-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UjcADekYCYXqf8TH26Z9Dx1cvlfZd7QLXb1j/bwerRk7iN8aVnHCR9yXTp5DlldX WShhkk8UWveyAhVEjVd02w== 0000929624-98-001285.txt : 19980729 0000929624-98-001285.hdr.sgml : 19980729 ACCESSION NUMBER: 0000929624-98-001285 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19980727 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NVIDIA CORP/CA CENTRAL INDEX KEY: 0001045810 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 943177549 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-47495 FILM NUMBER: 98671442 BUSINESS ADDRESS: STREET 1: 1226 TIROS WAY STREET 2: 415-617-4000 CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4086174000 MAIL ADDRESS: STREET 1: 1226 TIROS WAY CITY: SUNNYVALE STATE: CA ZIP: 94086 S-1/A 1 AMENDMENT NO. 3 TO FORM S-1 - FILE #333-47495 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 1998 REGISTRATION NO. 333-47495 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- NVIDIA CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) -------------- DELAWARE 3674 94-3177549 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER) INCORPORATION OR CODE NUMBER) ORGANIZATION) 3535 MONROE DRIVE SANTA CLARA, CA 95051 (408) 615-2500 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) -------------- JEN-HSUN HUANG CHIEF EXECUTIVE OFFICER NVIDIA CORPORATION 3535 MONROE DRIVE SANTA CLARA, CA 95051 (408) 615-2500 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: JAMES C. GAITHER LARRY W. SONSINI ERIC C. JENSEN JAMES N. STRAWBRIDGE KARYN R. SMITH JON C. GONZALES COOLEY GODWARD LLP WILSON SONSINI GOODRICH & ROSATI PROFESSIONAL CORPORATION ONE MARITIME PLAZA 20TH FLOOR 650 PAGE MILL ROAD SAN FRANCISCO, CA 94111 PALO ALTO, CA 94304 (415) 693-2000 (650) 493-9300 -------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement number for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] -------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS (Subject to Completion) Issued July 27, 1998 Shares [LOGO OF NVIDIA] COMMON STOCK ----------- ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE SHARES OF COMMON STOCK OFFERED HEREBY HAVE BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "NVDA" SUBJECT TO OFFICIAL NOTICE OF ISSUANCE. ----------- THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 6 HEREOF. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------- PRICE $ A SHARE -----------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS (1) COMPANY (2) -------- --------------- ----------- Per Share.................................. $ $ $ Total(3)................................... $ $ $
- ----- (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriters." (2) Before deducting expenses payable by the Company estimated at $1,150,000. (3) The Company has granted the Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of additional Shares at the price to public less underwriting discounts and commissions for the purpose of covering over-allotments, if any. If the Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions and proceeds to Company will be $ , $ and $ , respectively. See "Underwriters." ----------- The Shares are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein and subject to approval of certain legal matters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the Underwriters. It is expected that delivery of the Shares will be made on or about , 1998 at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ----------- MORGAN STANLEY DEAN WITTER HAMBRECHT & QUIST CIBC OPPENHEIMER , 1998 [Description of illustration: four computer monitors depicting 3D rendering of a building exterior, a game image, an anatomy illustration and the eye of a frog. The caption is "Awesome 3D graphics-mainstream". The NVIDIA name and logo also are depicted.] Text to accompany artwork: NVIDIA designs, develops and markets 3D graphics processors and related software that provide high performance interactive 3D graphics to the mainstream PC market. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS." [Description of illustration: Two-page computer display 3D rendering of a frog on a lilypad] MAKING FANTASY REALITY AND REALITY FANTASTIC. ARTWORK TEXT: FOCUS ON MAINSTREAM PC users today can easily differentiate the quality of graphics and prefer PCs that provide a superior visual experience. NVIDIA's strategy is to achieve market leadership in the high volume mainstream PC market by providing compelling 3D graphics performance at competitive prices. AWARD-WINNING TECHNOLOGY NVIDIA's RIVA128 graphics processor is a highly integrated single-chip solution that supports high performance interactive 3D graphics applications while simultaneously optimizing 2D graphics and providing VGA compatibility and DVD playback. The benefits and performance of the RIVA128 graphics processor have received significant industry validation and have enabled the Company's customers to win over 40 industry awards. LEADING OEMS NVIDIA's strategy is to enable leading OEM customers to differentiate their products in a highly competitive marketplace by using NVIDIA's high performance 3D graphics processors. The Company's products are used by five of the top ten PC OEMs in the United States--Compaq, Dell, Gateway 2000, Micron and Packard Bell NEC--and by leading add-in board manufacturers such as Diamond and STB. [OEM LOGOs] PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY NVIDIA designs, develops and markets 3D graphics processors and related software that provide high performance interactive 3D graphics to the mainstream PC market. The Company's graphics processors are designed to deliver a highly immersive, interactive 3D experience with realistic imagery and stunning effects. The RIVA128 and RIVA128ZX graphics processors provide superior processing power at competitive prices and are architected to take advantage of mainstream industry standards such as Microsoft's Direct3D API. The highly integrated design of the Company's graphics processors combines high performance 3D and 2D graphics on a single chip and provides a simpler and lower cost graphics solution relative to competing solutions, including multi- chip or multi-board 2D/3D graphics subsystems. NVIDIA designed the RIVA128 graphics processor to enable PC OEMs and add-in board manufacturers to build award-winning products by delivering state-of-the- art interactive 3D graphics capability to end users while maintaining affordable prices. The Company believes that by developing 3D graphics solutions that provide superior performance and address the key requirements of the mainstream PC market, it will accelerate the adoption of 3D graphics throughout this market. The benefits and performance of the RIVA128 graphics processor have received significant industry validation and have enabled the Company's customers to win over 80 industry awards. NVIDIA's graphics processors currently are designed into products offered by five of the top ten PC OEMs in the United States--Compaq, Dell, Gateway 2000, Micron and Packard Bell NEC--and by leading add-in board manufacturers such as Diamond and STB. THE OFFERING Common Stock offered................. shares Common Stock to be outstanding after the offering........................ shares(1) Use of proceeds...................... For general corporate purposes, including capital expenditures and working capital. See "Use of Proceeds." Nasdaq National Market symbol........ NVDA
SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, QUARTER ENDED PERIOD FROM INCEPTION ---------------------------------- ------------------- (APRIL 5, 1993) TO MARCH 30, MARCH 29, DECEMBER 31, 1993 1994 1995 1996 1997 1997 1998 --------------------- ------- ------- ------- ------- --------- --------- STATEMENT OF OPERATIONS DATA: Total revenue........... $ -- $ -- $ 1,182 $ 3,912 $29,071 $ 65 $37,662 Gross profit (loss)..... -- -- (367) 874 7,845 (143) 10,103 Operating income (loss). (506) (1,351) (6,470) (2,993) (2,560) (1,144) 2,947 Net income (loss)....... (484) (1,361) (6,377) (3,077) (2,691) (1,176) 2,180 Basic net income (loss) per share(2)........... $ (.07) $ (.19) $ (.56) $ (.27) $ (.21) $ (.10) $ .15 Diluted net income (loss) per share(2).... $ (.07) $ (.19) $ (.56) $ (.27) $ (.21) $ (.10) $ .08 Shares used in basic per share computation(2)... 6,784 7,048 11,365 11,383 12,677 11,578 14,142 Shares used in diluted per share computation(2)......... 6,784 7,048 11,365 11,383 12,677 11,578 25,729
MARCH 29, 1998 ---------------------- ACTUAL AS ADJUSTED(3) ------- -------------- BALANCE SHEET DATA: Cash and cash equivalents................................ $ 8,640 $ Total assets............................................. 36,738 Capital lease obligations, less current portion.......... 2,143 Total stockholders' equity............................... 9,257
- ------- (1) Based on the number of shares outstanding as of March 29, 1998. Excludes (i) 6,066,833 shares of Common Stock issuable upon the exercise of options outstanding at a weighted average exercise price of $3.91 per share, (ii) 158,806 shares of Common Stock issuable upon the exercise of warrants outstanding at a weighted average exercise price of $2.10 per share, (iii) 3,911,457 shares of Common Stock reserved for future grants under the Company's 1998 Equity Incentive Plan, (iv) 300,000 shares reserved for future grants under the Company's 1998 Non-Employee Directors' Stock Option Plan, (v) 500,000 shares of Common Stock reserved for issuance under the Company's 1998 Employee Stock Purchase Plan and (vi) 131,750 shares of Common Stock issuable upon exercise of options granted after March 29, 1998. See "Management--Employee Benefit Plans" and Notes 3 and 8 of Notes to Financial Statements. (2) See Note 1 of Notes to Financial Statements for an explanation of the determination of the number of shares used in per share computations. (3) Adjusted to reflect the sale of the shares of Common Stock offered hereby at an assumed initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization." 3 NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ---------------- UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 The Company............................................................... 5 Risk Factors.............................................................. 6 Use of Proceeds........................................................... 21 Dividend Policy........................................................... 21 Capitalization............................................................ 22 Dilution.................................................................. 23 Selected Financial Data................................................... 24 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 25 Business.................................................................. 34 Management................................................................ 47 Certain Transactions...................................................... 56 Principal Stockholders.................................................... 57 Description of Capital Stock.............................................. 59 Shares Eligible for Future Sale........................................... 61 Underwriters.............................................................. 63 Legal Matters............................................................. 64 Experts................................................................... 64 Additional Information.................................................... 65 Index to Financial Statements............................................. F-1
---------------- The Company intends to furnish to its stockholders annual reports containing financial statements audited by an independent public accounting firm and quarterly reports for the first three quarters of each year containing unaudited interim financial information. ---------------- NVIDIA is a registered trademark of the Company and the Company has filed for trademark protection for the NVIDIA logo. The Company and ST Microelectronics, Inc. have filed jointly for trademark protection for RIVA128. All other trademarks or service marks appearing in this Prospectus are the property of their respective owners. ---------------- Except as set forth in the financial statements or as otherwise indicated herein, information in this Prospectus (i) gives effect to the reincorporation of the Company from California to Delaware in April 1998, (ii) gives effect to the conversion of all of the Company's outstanding shares of Preferred Stock into shares of Common Stock, which will occur automatically upon the closing of this offering, and (iii) assumes that the Underwriters' over-allotment option is not exercised. See "Description of Capital Stock" and "Underwriters." The Company's fiscal years ended on December 31 from 1993 to 1997. Effective January 1, 1998, the Company changed its fiscal year end from December 31 to a 52- or 53-week year ending on the last Sunday in December. All general references to years relate to the above fiscal years unless otherwise noted. 4 THE COMPANY NVIDIA designs, develops and markets 3D graphics processors and related software that provide high performance interactive 3D graphics to the mainstream PC market. The Company's graphics processors incorporate a "fast- and-wide" 100 megahertz, 128-bit graphics architecture that is designed to deliver a highly immersive, interactive 3D experience with realistic imaging and stunning effects. The Company's RIVA128 and RIVA128ZX graphics processors provide superior processing power at competitive prices and are architected to take advantage of mainstream industry standards such as Microsoft Corporation's ("Microsoft") Direct3D application programming interface ("API"). The highly integrated design of the RIVA128 and RIVA128ZX graphics processors combines high performance 3D and 2D graphics on a single chip and provides a simpler and lower cost graphics solution relative to competing solutions, including multi-chip or multi-board 2D/3D graphics subsystems. Interactive 3D graphics technology is emerging as one of the most significant new computing developments since the introduction of the graphical user interface. The visually engaging and interactive nature of 3D graphics responds to consumers' demands for a convincing simulation of reality beyond what is possible with traditional 2D graphics. The fundamental interactive capability of 3D graphics is expected to make it a natural and compelling medium for existing and emerging applications for entertainment, Internet, business and education. The Company believes that a PC's interactive 3D graphics capability represents one of the primary means by which users differentiate among various systems. PC users today can easily differentiate the quality of graphics and prefer personal computers that provide a superior visual experience. These factors have dramatically increased demand for 3D graphics processors; Mercury Research estimates that 3D graphics will be standard in every PC unit shipped by 2001. Mercury Research also estimates that 8.6 million 3D graphics processors were sold in 1997 and 180 million will be sold in 2001. The Company's products allow users to enjoy a highly immersive, interactive 3D experience with compelling visual quality, realistic motion and complex object and scene interaction at real-time frame rates. By providing this level of performance at an affordable price to OEMs and end users, the Company believes that it will accelerate the adoption of interactive 3D graphics throughout the mainstream PC market. The Company's objective is to be the leading supplier of high performance 3D graphics processors for PCs. The Company's strategy to achieve this objective includes focusing on the mainstream PC market, targeting leading OEM customers, extending its technological leadership in 3D graphics and increasing its market share by leveraging strategic alliances. NVIDIA's products are used by five of the top ten PC OEMs in the United States--Compaq Computer Corporation ("Compaq"), Dell Computer Corporation ("Dell"), Gateway 2000, Inc. ("Gateway 2000"), Micron Technology, Inc. ("Micron") and Packard Bell NEC, Inc. ("Packard Bell NEC")--and leading add-in board manufacturers such as Diamond Multimedia Systems, Inc. ("Diamond") and STB Systems, Inc. ("STB"). The RIVA128 graphics processor has received significant industry validation and has enabled the Company's customers to receive over 80 awards from recognized industry publications, including PC Magazine, PC Computing, PC World, Computer Gaming World, PC Games and CNET. NVIDIA was incorporated in California in April 1993 and reincorporated in Delaware in April 1998. The Company's executive offices are located at 3535 Monroe Drive, Santa Clara, California 95051, and its telephone number is (408) 615-2500. 5 RISK FACTORS In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Common Stock offered hereby. This Prospectus contains forward- looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in such forward- looking statements. Factors that may cause such a difference include, but are not limited to, those discussed below, in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and elsewhere in this Prospectus. Unpredictable and Fluctuating Operating Results. Many of the Company's revenue components fluctuate and are difficult to predict, and its operating expenses are largely independent of revenue in any particular period. It is therefore difficult for the Company to accurately forecast revenue and profits or losses. The Company believes that, even if it does achieve significant sales of its products, quarterly and annual results of operations will be affected by a variety of factors that could materially adversely affect revenue, gross profit and results of operations. Factors that have affected the Company's results of operations in the past, and are likely to affect the Company's results of operations in the future, include, among others, demand and market acceptance for the Company's products; the successful development of next-generation products; unanticipated delays or problems in the introduction or performance of next-generation products; market acceptance of the products of the Company's customers; new product announcements or product introductions by the Company's competitors; the Company's ability to introduce new products in accordance with OEM design requirements and design cycles; changes in the timing of product orders due to unexpected delays in the introduction of products of the Company's customers or due to the life cycles of such customers' products ending earlier than anticipated; fluctuations in the availability of manufacturing capacity or manufacturing yields; competitive pressures resulting in lower than expected average selling prices; the volume of orders that are received and that can be fulfilled in a quarter; the rescheduling or cancellation of customer orders; the unanticipated termination of a strategic relationship; seasonal fluctuations associated with the tendency of PC sales to decrease in the second quarter and increase in the second half of each calendar year; and the level of expenditures for research and development and sales, general and administrative functions of the Company. For example, the Company began shipping the RIVA128ZX graphics processor in March 1998 and experienced difficulties in achieving volume production. The Company believes that these production issues have been resolved, and it began volume production of the RIVA128ZX graphics processor in the second quarter of 1998. However, there can be no assurance that the Company will not experience difficulties related to the production of current or future products or that other factors will not delay the introduction or volume sale of new products developed by the Company. The Company believes that quarterly and annual results of operations also could be affected in the future by other factors, including changes in the relative volume of sales of the Company's products; seasonality in the PC market; the ability of the Company to reduce the process geometry of its products; supply constraints for the other components incorporated into its customers' products; the loss of a key customer; a reduction in the amount of royalties received from ST Microelectronics, Inc. ("ST"); changes in the pricing of dynamic random access memory devices ("DRAMs") or other components; legal and other costs related to defending intellectual property litigation; costs associated with protecting the Company's intellectual property; inventory write-downs; and foreign exchange rate fluctuations. Any one or more of these factors could result in the Company failing to achieve its expectations as to future revenue or net income. Because most operating expenses are relatively fixed in the short term, the Company may be unable to adjust spending sufficiently in a timely manner to compensate for any unexpected sales shortfall, which could materially adversely affect quarterly results of operations. The Company will be required to reduce prices in response to competition or to pursue new market opportunities. If new competitors, technological advances by existing competitors or other competitive factors require the Company to invest significantly greater resources than anticipated in research and development or sales and marketing efforts, the Company's business, financial condition and results of operations could be materially adversely affected. Accordingly, the Company believes that period-to-period comparisons of its results of operations should not be relied upon as an indication of future 6 performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year. As a result of fluctuating operating results or other factors discussed below, in certain future quarters the Company's results of operations may be below the expectations of public market analysts or investors. In such event, the market price of the Company's Common Stock would be materially adversely affected. See "--Absence of Prior Trading Market; Potential Volatility of Stock Price" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Limited Operating History; History of Losses; No Assurance of Profitability. The Company has a limited operating history upon which investors may evaluate the Company and its prospects. The Company's recent revenue growth may not be sustainable and should not be considered indicative of future revenue growth, if any. As of March 29, 1998, the Company's accumulated deficit was approximately $11.8 million. Although the Company generated net income in the quarters ended March 29, 1998 and December 31, 1997, it incurred significant losses in each other quarter of fiscal 1997 and in each quarter of its prior fiscal years. There can be no assurance that in the future the Company will be profitable on a quarterly or annual basis. The Company's prospects must be considered in light of the significant risks, challenges and difficulties frequently encountered by companies in their early stage of development, particularly companies in intensely competitive and rapidly evolving markets such as the 3D graphics processor market and semiconductor industry. To address these risks, the Company must, among other things, successfully increase the scope of its operations, respond to competitive and technological developments, continue to attract, retain and motivate qualified personnel and continue to commercialize products incorporating innovative technologies. There can be no assurance that the Company will be successful in addressing these risks and challenges. See "--Highly Competitive Environment; Intel's Entry into the Market," "--Dependence on New Product Development; Need to Manage Product Transitions," "--Management of Growth," "--Dependence on Key Personnel" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Dependence on Emerging Mainstream PC 3D Graphics Market. The Company's success will depend in part upon the demand for 3D graphics for mainstream PC applications. The market for 3D graphics on mainstream PCs has only recently begun to emerge and is dependent on the future development of, and substantial end-user and OEM demand for, 3D graphics functionality. As a result, there can be no assurance that the market for mainstream PC 3D graphics computing will continue to develop or grow at a rate sufficient to support the Company's business. The development of the market for 3D graphics on mainstream PCs will in turn depend on the development and availability of a large number of mainstream PC software applications that support or take advantage of 3D graphics capabilities. Currently there are only a limited number of such software applications, most of which are games, and there can be no assurance that a broader base of software applications will develop in the near term or at all. Until very recently, the majority of multimedia PCs incorporated only 2D graphics acceleration technology, and as a result, the majority of graphics applications currently available for mainstream PCs are written for 2D acceleration technology. Consequently, there can be no assurance that a broad market for full function 3D graphics on mainstream PCs will develop. If the market for mainstream PC 3D graphics fails to develop or develops more slowly than expected, the Company's business, financial condition and results of operations would be materially adversely affected. See "--Dependence on the PC Market." Dependence upon Acceptance of the Company's 3D Graphics Solution for the Mainstream PC Market. The Company's success will depend in part upon broad adoption of its 3D graphics processors for high performance 3D graphics in mainstream PC applications. The market for 3D graphics processors has been characterized by unpredictable and sometimes rapid shifts in the popularity of products, often caused by the publication of competitive industry benchmark results, changes in DRAM pricing and other changes in the total system cost of add-in boards, as well as by severe price competition and by frequent new technology and product introductions. Only a small number of products have achieved broad market acceptance and such market acceptance, if achieved, is difficult to sustain due to intense competition. Since the Company has no other product line, the Company's business, financial condition and results of operations would be materially adversely affected if for any reason its current or future 3D graphics processors do not achieve widespread acceptance in the mainstream PC market. If the Company is unable to complete the timely development of or successfully and cost-effectively 7 manufacture and deliver products that meet the requirements of the mainstream PC market, the Company's business, financial condition and results of operations would be materially adversely affected. In addition, the PC industry is seasonal, and the Company expects that its financial results in the future will be affected by such seasonality. Demand for the Company's products has been and will continue to be significantly affected by actual and anticipated changes in the price and supply of DRAM products or other components used with PC graphics processors. Recently, large supplies of synchronous DRAMs ("SDRAMs") resulted in significant price declines for such components. This price decrease has lowered the total system cost to customers of competitive products that use such SDRAMS, as compared to the Company's RIVA128 graphics processor, which is designed to operate using only synchronous graphic DRAMS ("SGDRAMS"), which are relatively more expensive than SDRAMs. The Company expects that such unfavorable price competition may negatively impact sales of the Company's products. The Company expects to release a version of its RIVA128ZX graphics processor shortly that will operate either with SDRAMS or SGDRAMS. There can be no assurance that the Company will be successful in designing the RIVA128ZX graphics processor to operate with SDRAMS or that future fluctuations in price of components used by customers of PC graphics processors will not have a material adverse effect on the Company's business, financial condition or results of operations. The sub-$1,000 segment of the mainstream PC market has grown rapidly in recent quarters. The Company currently does not have a product offering to address this market segment. If the Company is unable to introduce a product that addresses this market segment and the sub-$1,000 segment continues to account for an increasing percentage of the units sold in the mainstream PC market, the Company's business, financial condition or results of operations could be materially adversely affected. Highly Competitive Environment; Intel's Entry into the Market. The market for 3D graphics processors for mainstream PCs in which the Company competes is intensely competitive and is characterized by rapid technological change, evolving industry standards and declining average selling prices. NVIDIA believes that the principal factors of competition in this market are performance, conformity to industry-standard APIs, software support, access to customers and distribution channels, manufacturing capabilities, price of graphics processors and total system costs of add-in boards. The Company expects competition to increase both from existing competitors and new market entrants with products that may be less costly than the Company's 3D graphics processors or may provide better performance or additional features not provided by the Company's products. There can be no assurance that the Company will be able to compete successfully in the emerging mainstream PC 3D graphics market. NVIDIA's primary source of competition is from companies that provide or intend to provide 3D graphics solutions for the mainstream PC market. These include (i) new entrants in the 3D graphics processor market with existing presence in the PC market, such as Intel Corporation ("Intel"), (ii) suppliers of graphics add-in boards that utilize their internally developed graphics chips, such as ATI Technologies, Inc. ("ATI") and Matrox Electronic Systems Ltd. ("Matrox"), (iii) suppliers of 2D graphics chips that are introducing 3D functionality as part of their existing solutions, such as S3 Incorporated ("S3") and Trident Microsystems, Inc. ("Trident"), (iv) companies that have traditionally focused on the professional market and provide high end 3D solutions for PCs and workstations, including 3Dlabs Inc., Ltd. ("3Dlabs"), Real3D and Silicon Graphics, Inc. ("SGI"), and (v) companies with strength in the interactive entertainment market, such as Chromatic Research, Inc. ("Chromatic"), 3Dfx Interactive, Inc. ("3Dfx") and Rendition, Inc. ("Rendition"). In March 1998, Intel began shipping the i740, a 3D graphics accelerator that is targeted at the mainstream PC market. Intel has significantly greater resources than the Company, and there can be no assurance that the Company's products will compete effectively against the i740 or any future products introduced by Intel, that the Company will be able to compete effectively against Intel or that Intel will not introduce additional products that are competitive with the Company's products in either performance or price or both. NVIDIA expects Intel to continue to invest heavily in research and development and new manufacturing facilities, to maintain its position as the largest manufacturer of PC microprocessors and one of the largest manufacturers of motherboards, 8 to increasingly dominate the PC platform and to promote its product offerings through advertising campaigns designed to engender brand loyalty among PC users. Intel may in the future develop graphics add-in cards or graphics- enabled motherboards using its i740 3D graphics accelerators or other graphics accelerators, which could directly compete with graphics add-in cards or graphics-enabled motherboards that the Company's customers may develop. In addition, due to the widespread industry acceptance of Intel's microprocessor architecture and interface architecture, including its Accelerated Graphics Port ("AGP"), Intel exercises significant influence over the PC industry generally, and any significant modifications by Intel to the AGP, the microprocessor or other aspects of the PC microprocessor architecture could result in incompatibility with the Company's technology, which would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, any delay in the public release of information relating to such modifications could have a material adverse effect on the Company's business, financial condition or results of operations. In April 1998, SGI and Intel announced a strategic relationship, which includes a broad patent cross-license agreement. The Company believes that this agreement will provide SGI with access to Intel processors for the development of SGI workstations. In addition, the Company believes that under the cross-license agreement Intel will have access to SGI graphics patents, which may allow Intel to compete more effectively with the Company. SGI also may compete directly with the Company as a result of this relationship with Intel. There can be no assurance that the Company will be able to compete successfully against SGI or Intel. SGI filed a patent infringement lawsuit against the Company in April 1998. See "--Legal Proceedings" and "Business-- Legal Proceedings." In addition to Intel, the Company competes with suppliers of graphics add-in boards that utilize their internally developed graphics chips, such as ATI and Matrox. NVIDIA also competes with companies that typically have operated in the PC 2D graphics market and that now offer 3D graphics capability as an enhancement to their 2D graphics solutions, such as S3 and Trident. Many of these competitors have introduced 3D graphics functionality on new versions of existing graphics chips. In addition, NVIDIA's competitors include companies that traditionally have focused on the production of high end 3D graphics systems targeted at the professional market, such as 3Dlabs and Real3D. While these companies produce high performance 3D graphics systems, they historically have done so at a significantly higher price point than the Company and have focused on the professional and engineering market. Some of these companies are developing lower cost versions of their 3D graphics technology to bring workstation-like 3D graphics to mainstream PCs, and there can be no assurance that the Company will be able to compete successfully against them. For example, 3Dlabs markets the PERMEDIA 2, a graphics accelerator designed for the mainstream PC market. NVIDIA also competes with companies that have recently entered or are expected to enter the market with an integrated 3D/2D graphics solution, but which have not traditionally manufactured 2D graphics solutions, such as Chromatic, 3Dfx and Rendition. In addition to the Company's known competitors, the Company anticipates that there will be new entrants in the graphics processor market, and there can be no assurance that the Company will compete effectively against any such new competitors. Several of the Company's current and potential competitors have substantially greater financial, technical, manufacturing, marketing, distribution and other resources, greater name recognition and market presence, broader product lines for the PC market, longer operating histories, lower cost structures and larger customer bases than the Company. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. Regardless of the relative qualities of the Company's products, the market power, product breadth and customer relationships of its larger competitors, particularly Intel, can be expected to provide such competitors with substantial competitive advantages. The Company does not seek to compete on the basis of price alone, but may be forced to lower prices to compete effectively. There can be no assurance that the Company will be able to compete successfully in the emerging mainstream PC 3D graphics market. Dependence on New Product Development; Need to Manage Product Transitions. The Company's business, financial condition and results of operations will depend to a significant extent on its ability to successfully 9 develop new products for the 3D graphics market. The Company's add-in board manufacturers and major OEM customers typically introduce new system configurations as often as twice per year, typically based on spring and fall design cycles. Accordingly, the Company's existing products must have competitive performance levels or the Company must timely introduce new products with such performance characteristics in order to be included in new system configurations. The Company must anticipate the features and functionality that consumers will demand, incorporate those features and functionality into products that meet the exacting design requirements of PC OEMs and add-in board manufacturers, price its products competitively and introduce the products to the market within the limited window for PC OEM and add-in board manufacturer design cycles. As a result, the Company believes that significant expenditures for research and development will continue to be required in the future. The success of new product introductions will depend on several factors, including proper new product definition, timely completion and introduction of new product designs, the ability of ST, Taiwan Semiconductor Manufacturing Co. ("TSMC") and any additional manufacturers to effectively manufacture new products, the ability of the Company to design products that effectively utilize the process technologies of ST, TSMC or any other third-party manufacturers, the quality of any new products, differentiation of new products from those of the Company's competitors and market acceptance of the Company's and its customers' products. There can be no assurance that any new products the Company expects to introduce will incorporate the features and functionality demanded by PC OEMs, add-in board manufacturers and consumers of 3D graphics, will be successfully developed or will be introduced within the appropriate time to meet both the PC OEMs' design cycles and market demand. The Company has in the past experienced delays in the development of some new products, as discussed below. The failure by the Company to successfully develop, introduce or achieve market acceptance for new 3D graphics products would have a material adverse effect on the Company's business, financial condition and results of operations. As markets for the Company's 3D graphics processors develop and competition increases, the Company anticipates that product life cycles will remain short and average selling prices ("ASPs") will continue to decline. In particular, ASPs and gross margins for the Company's 3D graphics processors are expected to decline as each product matures and as per order unit volumes increase. As a result, the Company will need to introduce new products and enhancements to existing products to maintain overall average selling prices and gross margins. In order for the Company's 3D graphics processors to achieve high volumes, leading PC OEMs and add-in board manufacturers must select the Company's 3D graphics processor for design into their products, and then successfully complete the designs of their products and sell them. There can be no assurance that the Company will successfully identify new product opportunities, develop and bring to market in a timely fashion such new products, that any such new products will be selected for design into PC OEMs' and add-in board manufacturers' products, that such designs will be successfully completed or that such products will be sold. As the complexity of its products increases, there is an increasing risk that the Company will experience problems with the performance of such products and that there will be delays in the development or introduction of such products. In particular, the Company began shipping the RIVA128ZX graphics processor in March 1998 and experienced difficulties in achieving volume production. The Company believes that these production issues have been resolved, and the Company began volume production of the RIVA128ZX graphics processor in the second quarter of 1998. There can be no assurance, however, that the Company will not experience difficulties related to the production of current or future products or that other factors will not delay the introduction or volume sale of new products developed by the Company. There also can be no assurance that the Company will be able to successfully manage the production transition risks with respect to the RIVA128ZX graphics processor or other future products. Failure to achieve any of the foregoing with respect to the RIVA128ZX graphics processor, future products or product enhancements could result in rapidly declining ASPs, reduced margins, reduced demand for products or loss of market share, any of which could have a material adverse effect on the Company's business, financial condition or results of operations. In addition, there can be no assurance that technologies developed by others will not render the Company's 3D graphics products non-competitive or obsolete, which would have a material adverse effect on the Company's business, financial condition and results of operations. In the design and development of new products and product enhancements, the Company relies on certain third-party software development tools. While the Company currently is not dependent on any one vendor for 10 the supply of such tools, there can be no assurance that all or any of such tools will be readily available in the future. For example, the Company has experienced delays in the introduction of products in the past as a result of the inability of then-available software development tools to fully simulate the complex features and functionalities of the Company's products. There can be no assurance that the design requirements necessary to meet consumer demands for more features and greater functionality from 3D graphics products in the future will not exceed the capabilities of any such software development tools. If the software development tools used by the Company become unavailable or fail to produce designs that meet consumer demands, the Company's business, financial condition or results of operations could be materially adversely affected. Legal Proceedings. On April 9, 1998, the Company was notified that SGI had filed a patent infringement lawsuit against the Company in the United States District Court for the District of Delaware. The suit alleges that the sale and use of the Company's RIVA family of 3D graphics processors infringes a United States patent held by SGI. The suit seeks unspecified damages (including treble damages), an order permanently enjoining further alleged infringement and attorneys' fees. On May 11, 1998, the Company was notified that S3 had filed a patent infringement lawsuit against the Company in the United States District Court for the Northern District of California. The suit alleges that the sale and use of the Company's RIVA family of 3D graphics processors infringes three United States patents held by S3. The suit seeks unspecified damages (including treble damages), preliminary and permanent orders enjoining further alleged infringement and attorneys' fees. The Company has filed answers to each suit and has filed counter-claims asserting that the patents in each suit are neither infringed nor valid. Based on its investigation to date, the Company believes that it has meritorious defenses to the claims brought and the Company intends to defend itself vigorously with respect to both lawsuits. S3 also has filed a motion for preliminary injunction to bar the Company's manufacture or sale of the RIVA128 products pending a final determination of the lawsuit. The Company believes that it has meritorious defenses to the preliminary injunction motion and intends to defend itself vigorously. The Company expects that the litigation with SGI and S3 will likely result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation results in a favorable determination for the Company. In the event of an adverse result in either suit, the Company could be required to do one or more of the following: pay substantial damages (including treble damages); preliminarily or permanently cease the manufacture, use and sale of any infringing products; expend significant resources to develop non-infringing technology; or obtain a license from SGI or S3 for any infringing technology. Either of these suits could result in limitations on the Company's ability to market its products, delays and costs associated with redesigning its products or payments of license fees or other payments to SGI or S3, any of which would have a material adverse effect on the Company's business, financial condition and results of operations. Importance of Design Wins. The Company's future success will depend in large part on achieving design wins, which entails having its existing and future products chosen as the 3D graphics processors for hardware components or subassemblies designed by PC OEMs and add-in board manufacturers. The Company's add-in board manufacturers and major OEM customers typically introduce new system configurations as often as twice per year, typically based on spring and fall design cycles. Accordingly, the Company's existing products must have competitive performance levels or the Company must timely introduce new products with such performance characteristics in order to be included in new system configurations. The failure to achieve one or more design wins would have a material adverse effect on the Company's business, financial condition and results of operations. The process of being qualified for inclusion in a PC OEM's product can be lengthy and could cause the Company to miss a cycle in the demand of end users for a particular product feature, which also could materially adversely affect the Company's business, financial condition or results of operations. The Company's ability to achieve design wins will depend in part on its ability to identify and ensure compliance with evolving industry standards. Unanticipated changes in industry standards could render the Company's products incompatible with products developed by major hardware manufacturers and software developers, including Intel and Microsoft, which would require the Company to invest significant time and resources to redesign its products to ensure compliance with relevant standards. If the Company's products are 11 not in compliance with prevailing industry standards for a significant period of time, the Company's ability to achieve design wins could be materially adversely affected. The failure to achieve design wins, due to any of the foregoing factors or otherwise, would result in the loss of any potential sales volume that could be generated by such newly designed PC hardware component or board subassembly and would give a competitive advantage to the 3D graphics processor manufacturer that achieved such design win. Dependence on the PC Market. In 1997 and the first quarter of 1998, the Company derived all of its revenue from the sale or license of products for use in PCs, and the Company expects to continue to derive substantially all of its revenue from the sale or license of products for use in PCs. The PC market is characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and significant price competition, resulting in short product life cycles and regular reductions of average selling prices over the life of a specific product. Although the PC market has grown substantially in recent years, there can be no assurance that such growth will continue. A reduction in sales of PCs, or a reduction in the growth rate of such sales, would likely reduce demand for the Company's products. Moreover, such changes in demand could be large and sudden. Since PC manufacturers often build inventories during periods of anticipated growth, they may be left with excess inventories if growth slows or if they have incorrectly forecast product transitions. In such cases, PC manufacturers may abruptly suspend substantially all purchases of additional inventory from suppliers such as the Company until the excess inventory has been absorbed. Any reduction in the demand for PCs generally, or for a particular product that incorporates the Company's 3D graphic processors, could have a material adverse effect on the Company's business, financial condition or results of operations. Customer Concentration; Risks of Order and Shipment Uncertainties. The Company has only a limited number of customers and its sales are highly concentrated. The Company primarily sells its products to add-in board manufacturers, which incorporate graphics products in the boards they sell to PC OEMs. Sales to STB and Diamond accounted for 63% and 31%, respectively, of the Company's total revenue in 1997 and 49% and 39%, respectively, of the Company's total revenue in the first quarter of 1998. Sales to add-in board manufacturers primarily are dependent on achieving design wins with leading PC OEMs, and the Company believes that the large majority of its revenue in its most recent three quarters was attributable to products that ultimately were incorporated into PCs sold by Compaq, Dell, Gateway 2000, Micron and Packard Bell NEC. The number of add-in board manufacturers and leading PC OEMs is limited, and the Company expects that a small number of add-in board manufacturers directly, and a small number of PC OEMs indirectly, will continue to account for a substantial portion of its revenue for the foreseeable future. In particular, the Company expects that sales to STB and Diamond will continue to account for a substantial portion of its revenue for the foreseeable future. As a result, the Company's business, financial condition and results of operations could be materially adversely affected by the decision of a single PC OEM or add-in board manufacturer to cease using the Company's products or by a decline in the number of products sold by a single PC OEM or add-in board manufacturer or by a small number of customers. In addition, there can be no assurance that revenue from add-in board manufacturers or PC OEMs that have directly or indirectly accounted for significant revenue in past periods, individually or as a group, will continue, or if continued, will reach or exceed historical levels in any future period. Substantially all of the Company's sales are made on the basis of purchase orders rather than long-term agreements. As a result, the Company may commit resources to the production of products without having received advance purchase commitments from customers. Any inability to sell products to which the Company has devoted significant resources could have a material adverse effect on the business, financial condition or results of operations of the Company. In addition, cancellation or deferral of product orders could result in the Company holding excess inventory, which could have a material adverse effect on the Company's profit margins and restrict its ability to fund its operations. The Company recognizes revenue upon shipment of products to the customer. Refusal by customers to accept shipped products, or delays or difficulties in collecting accounts receivable could result in significant charges against income, which could have a material adverse effect on the Company's business, financial condition or results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Management of Growth. The Company's rapid growth has placed, and is expected to continue to place, a significant strain on the Company's managerial, operational and financial resources. As of March 29, 1998, the Company had 119 employees as compared to 44 employees as of March 30, 1997, and the Company expects 12 that the number of its employees will increase substantially over the next 12 months. The Company's financial and management controls, reporting systems and procedures are very limited and will need to be upgraded significantly. Although some new controls, systems and procedures have been implemented, the Company's future growth, if any, will depend on its ability to continue to implement and improve operational, financial and management information and control systems on a timely basis, as well as its ability to maintain effective cost controls, and any failure to do so effectively could have a material adverse effect on the Company's business, financial condition or results of operations. Further, the Company will be required to manage multiple relationships with various customers and other third parties. There can be no assurance that the Company's systems, procedures or controls will be adequate to support the Company's operations or that the Company's management will be able to achieve the rapid execution necessary to successfully implement its strategy. The Company's inability to effectively manage any future growth would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company relocated to significantly larger facilities in July 1998. An inability of the Company to effectively manage the transition to larger facilities could have a material adverse effect on the Company's business, financial condition or results of operations. See "Business--Employees," "--Facilities" and "Management." Dependence on Third-Party Manufacturers; Absence of Manufacturing Capacity; Manufacturing Risks. The Company does not manufacture the semiconductor wafers used for its products and does not own or operate a wafer fabrication facility. The Company's products require wafers manufactured with state-of- the-art fabrication equipment and techniques. Substantially all of the Company's products currently are manufactured by ST in Crolles, France pursuant to a strategic collaboration agreement (the "ST Agreement"), and the Company has recently established a relationship with TSMC as a second semiconductor manufacturer. The Company obtains manufacturing services from both ST and TSMC on a purchase order basis, and neither ST nor TSMC has any obligation to provide the Company with any specified minimum quantities of product. Because the lead time needed to establish a strategic relationship with a new manufacturing partner could be several months, there is no readily available alternative source of supply for any specific product. A manufacturing disruption experienced by ST or TSMC would impact the production of the Company's products for a substantial period of time, which would have a material adverse effect on the Company's business, financial condition and results of operations. For example, in December 1997, the Company experienced low manufacturing yields at ST. The Company believes that long-term market acceptance for the Company's products will depend on reliable relationships with ST, TSMC and any other manufacturers used by the Company to ensure adequate product supply to respond to customer demand. ST has only recently begun to manufacture the Company's products in commercial quantities, and there can be no assurance that ST will be able to meet the Company's near-term or long-term manufacturing requirements. In addition, the Company's relationship with TSMC has only recently been established, and there can be no assurance that this relationship will meet the business objectives of the Company. Both ST and TSMC fabricate wafers for other companies, including certain competitors of the Company, and ST also manufactures wafers for its own needs, and either could choose to prioritize capacity for other uses or reduce or eliminate deliveries to the Company on short notice. There are many other risks associated with the Company's dependence upon third-party manufacturers, including reduced control over delivery schedules, quality assurance, manufacturing yields and cost; risks associated with international operations; the potential lack of adequate capacity during periods of excess demand; limited warranties on wafers supplied to the Company; and potential misappropriation of the Company's intellectual property. The Company is dependent primarily on ST and, to a lesser extent, TSMC, and expects in the future to continue to be dependent upon third-party manufacturers to produce wafers of acceptable quality and with acceptable manufacturing yields, to deliver those wafers to the Company and its independent assembly and testing subcontractors on a timely basis and to allocate to the Company a portion of their manufacturing capacity sufficient to meet the Company's needs. The Company's wafer requirements represent a very small portion of the total production capacity of ST. Although the Company's products are designed using ST's process design rules, there can be no assurance that ST will be able to achieve or maintain acceptable yields or deliver sufficient quantities of wafers on a timely basis or at an acceptable cost. Additionally, there can be no assurance 13 that ST will continue to devote resources to the production of the Company's products or continue to advance the process design technologies on which the manufacturing of the Company's products are based. Any such difficulties would have a material adverse effect on the Company's business, financial condition and results of operations. See "--Dependence on Third-Party Subcontractors for Assembly and Testing," "--Risks Associated with International Operations" and "Business--Manufacturing." Dependence on ST Microelectronics. In addition to the Company's reliance on ST to manufacture the Company's products, the Company licenses certain technology on a non-exclusive basis from ST for use with the Company's products. The inability of the Company to continue to license this technology could result in delays or cancellations in product shipments until equivalent technology can be identified, licensed or developed, and integrated with the Company's products. The ST Agreement also grants ST a worldwide license to sell the RIVA128 and RIVA128ZX graphics processors. Royalty revenue from sales of the RIVA128 graphics processor by ST represented 6% and 12% of the Company's total revenue in 1997 and the first quarter of 1998, respectively. The Company expects royalty revenue from ST to decrease in the second quarter of 1998 and subsequent quarters. In February 1998, ST and 3Dlabs established a supply relationship for the manufacture by ST of 3Dlabs' PERMEDIA 2 3D graphics accelerator. There can be no assurance that ST will not establish similar relationships with other competitors of the Company or that sales of the Company's products by ST will not be adversely affected by ST's relationship with 3Dlabs or any other competitor of the Company. Sales by ST of products similar to the Company's products could result in a decrease in the Company's revenue, which would have a material adverse effect on the Company's business, financial condition and results of operations. See "-- Dependence on Third-Party Manufacturers; Absence of Manufacturing Capacity; Manufacturing Risks," "--Dependence on Third-Party Subcontractors for Assembly and Testing" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Under the ST Agreement, ST also has a worldwide license to incorporate the technology underlying the RIVA128 and RIVA128ZX graphics processors (including the source code and architecture) (the "RIVA Technology") in its own products, subject to certain limitations on the modification of such technology, and a right to receive software engineering and quality support from the Company for the RIVA Technology through December 31, 1998. There can be no assurance that ST will not develop and market products competitive with those of the Company that contain additional features, better functionality and lower pricing. Because ST has substantially greater financial, technical, manufacturing, marketing, distribution and other resources than the Company, there can be no assurance that the Company will be able to compete successfully against any such ST product. The failure of the Company to successfully compete against any such ST product could have a material adverse effect on the Company's business, financial condition or results of operations. Dependence on Key Personnel. The Company's performance will be substantially dependent on the performance of its executive officers and key employees, many of whom have worked together for only a short period of time. In particular, each of the Company's Chief Financial Officer, Vice President, Product Marketing and Vice President, Corporate Marketing joined the Company in December 1997. None of the Company's officers or employees is bound by an employment agreement, and the relationships of such officers and employees with the Company are, therefore, at will. The Company does not have "key person" life insurance policies on any of its employees. The loss of the services of any of its executive officers, technical personnel or other key employees, particularly Jen-Hsun Huang, the Company's President and Chief Executive Officer, would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's success will depend on its ability to identify, hire, train and retain highly qualified technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to identify, attract, assimilate or retain highly qualified technical and managerial personnel in the future. The inability to attract and retain the necessary technical and managerial personnel would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Employees" and "Management." Manufacturing Yields. The fabrication of semiconductors is a complex process. Contaminants, defects in masks used to print circuits on wafers, difficulties in the fabrication process and other factors can cause a 14 substantial percentage of wafers to be rejected or a significant number of die on each wafer to be nonfunctional. These problems are difficult to diagnose and time-consuming and expensive to remedy. As a result, semiconductor companies frequently encounter difficulties in achieving acceptable product yields. When production of a new product begins, as with the RIVA128ZX graphics processor, the Company typically pays for wafers, which may or may not have any functional products. Accordingly, the Company bears the financial risk until production is stabilized. Once production is stabilized, the Company pays for functional die only. The Company typically begins wafer production in advance of stabilized yields. Failure to stabilize yields or failure to achieve acceptable yields would materially adversely affect the Company's revenue, gross profit and results of operations. For example, in December 1997, the Company experienced low manufacturing yields at ST. Any similar occurrences in the future could have a material adverse effect on the Company's business, financial condition or results of operations. Semiconductor manufacturing yields are a function both of product design, which is developed largely by the Company, and process technology, which is typically proprietary to the manufacturer. Since low yields may result from either design or process technology failures, yield problems may not be effectively determined or resolved until an actual product exists that can be analyzed and tested to identify process sensitivities relating to the design rules that are used. As a result, yield problems may not be identified until well into the production process, and resolution of yield problems would require cooperation by and communication between the Company and the manufacturer. This risk is compounded by the offshore location of the Company's manufacturers, increasing the effort and time required to identify, communicate and resolve manufacturing yield problems. As the Company's relationships with ST, TSMC and any additional manufacturing partners develop, yields or product performance could be adversely affected due to difficulties associated with adapting the Company's technology and product design to the proprietary process technology and design rules of each manufacturer. Because of the Company's potentially limited access to wafer fabrication capacity from its manufacturers, any decrease in manufacturing yields could result in an increase in the Company's per unit costs and force the Company to allocate its available product supply among its customers, thus potentially adversely impacting customer relationships as well as revenue and gross profit. There can be no assurance that the Company's wafer manufacturers will achieve or maintain acceptable manufacturing yields in the future. The inability of the Company to achieve planned yields from its wafer manufacturers could have a material adverse effect on the Company's business, financial condition or results of operations. The Company also faces the risk of product recalls resulting from design or manufacturing defects that are not discovered during the manufacturing and testing process. In the event of a significant number of product returns due to a defect or recall, the Company's business, financial condition or results of operations could be materially adversely affected. See "--Risks Associated with International Operations." Transition to New Manufacturing Process Technologies. The Company's future success will depend in part upon its ability to develop products that utilize new manufacturing process technologies. Manufacturing process technologies are subject to rapid change and require significant expenditures for research and development. The Company continuously evaluates the benefits of migrating to smaller geometry process technologies in order to improve performance and reduce costs. The Company believes that the transition of its products to increasingly smaller geometries will be important to its competitive position. Other companies in the industry have experienced difficulty in migrating to new manufacturing processes and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels. Moreover, the Company is dependent on its relationships with its third-party manufacturers to migrate to smaller geometry processes successfully. No assurance can be given that the Company will be able to migrate to new manufacturing process technologies successfully or on a timely basis. Any such failure by the Company could have a material adverse effect on its business, financial condition or results of operations. Dependence on Third-Party Subcontractors for Assembly and Testing. Substantially all of the Company's products historically have been assembled and tested by ST in Malta. The Company recently qualified Anam Semiconductor ("Anam"), which is located in Korea, to assemble and test the Company's RIVA128ZX graphics processor. The Company does not have long-term agreements with either of these suppliers. As a result of its dependence on third-party subcontractors for assembly and testing of its products, the Company does not directly 15 control product delivery schedules or product quality. Any product shortages or quality assurance problems could increase the costs of manufacture, assembly or testing of the Company's products and could have a material adverse effect on the Company's business, financial condition or results of operation. Due to the amount of time typically required to qualify assemblers and testers, the Company could experience significant delays in the shipment of its products if it is required to find alternative third parties to assemble or test the Company's products or components. Any delays in delivery of the Company's products could have a material adverse effect on the Company's business, financial condition or results of operations. See "Business--Manufacturing." Risks Relating to Intellectual Property. The Company relies primarily on a combination of patent, mask work protection, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements to protect its intellectual property. The Company has 19 patents issued and 21 patent applications pending in the United States. Such issued patents have expiration dates from May 2015 to November 2016. The issued patents and pending patent applications relate to technology developed by the Company in connection with the development of its 3D graphics processors, including the RIVA128 graphics processor. The Company has no foreign patents or patent applications. There can be no assurance that the Company's pending patent applications or any future applications will be approved, or that any issued patents will provide the Company with competitive advantages or will not be challenged by third parties, or that the enforcement of patents of others will not have an adverse effect on the Company's ability to do business. In addition, there can be no assurance that others will not independently develop substantially equivalent intellectual property or otherwise gain access to the Company's trade secrets or intellectual property, or disclose such intellectual property or trade secrets, or that the Company can meaningfully protect its intellectual property. A failure by the Company to effectively protect its intellectual property could have a material adverse effect on the Company's business, financial condition or results of operations. The Company attempts to protect its trade secrets and other proprietary information through confidentiality agreements with manufacturers and other partners, proprietary information agreements with employees and consultants and other security measures. The Company also relies on trademarks and trade secret laws to protect its intellectual property. Despite these efforts, there can be no assurance that others will not gain access to the Company's trade secrets, or that the Company can meaningfully protect its intellectual property. In addition, effective trade secret protection may be unavailable or limited in certain foreign countries. Although the Company intends to protect its rights vigorously, there can be no assurance that such measures will be successful. The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which has resulted in significant and often protracted and expensive litigation. The 3D graphics market in particular has been characterized recently by the aggressive pursuit of intellectual property positions, and the Company expects its competitors to continue to pursue aggressive intellectual property positions. In April 1998, SGI filed a patent infringement lawsuit against the Company and in May 1998, S-3 filed a patent infringement lawsuit against the Company. See "--Legal Proceedings." In addition, the Company from time to time has received notices alleging that the Company has infringed patents or other intellectual property rights owned by third parties. ST has certain patent licenses that in some cases may allow ST to manufacture the Company's products without infringing third-party patents. As the Company's products are manufactured by TSMC or other manufacturers, such licenses will no longer benefit the Company and therefore the risk of a third-party claim of patent infringement against the Company will increase. In the event infringement claims are made against the Company, the Company may seek licenses under such patents or other intellectual property rights. However, there can be no assurance that licenses will be offered or that the terms of any offered licenses will be acceptable to the Company. The failure to obtain a license from a third party for technology used by the Company could cause the Company to incur substantial liabilities and to suspend the manufacture of products. Furthermore, the Company may initiate claims or litigation against third parties for infringement of the Company's proprietary rights or to establish the validity of the Company's proprietary rights. The Company has agreed to indemnify certain customers for claims of infringement arising out of sale of the Company's product. Litigation by or against the Company or such customers concerning infringement would likely, and the SGI and S3 lawsuits will, result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation results in a favorable 16 determination for the Company. In the event of an adverse result in the SGI, S3 or other litigation, the Company could be required to pay substantial damages (which could include treble damages), cease the manufacture, use and sale of infringing products, expend significant resources to develop non- infringing technology, discontinue the use of certain processes or obtain licenses for the infringing technology. There can be no assurance that the Company would be successful in such development or that such licenses would be available on reasonable terms, or at all, and any such development or license could require expenditures by the Company of substantial time and other resources. Although patent disputes in the semiconductor industry have often been settled through cross-licensing arrangements, there can be no assurance that, in the event that SGI, S3 or any other third party makes a successful claim against the Company or its customers, a cross-licensing arrangement could be reached. If such a license is not made available to the Company on commercially reasonable terms, the Company's business, financial condition or results of operations could be materially adversely affected. There can be no assurance that infringement claims by third parties or claims for indemnification by customers or end users of the Company's products resulting from infringement claims will not be asserted in the future or that such possible assertions or the assertions currently raised in the SGI and S3 litigation, if proven to be true, will not materially adversely affect the Company's business, financial condition or results of operations. Any limitations on the Company's ability to market its products, or delays and costs associated with redesigning its products or payments of license fees to third parties, or any failure by the Company to develop or license a substitute technology on commercially reasonable terms, any of which may result from the SGI or S3 litigation, could have a material adverse effect on the Company's business, financial condition or results of operations. See "Business--Patents and Proprietary Rights." Risk of Product Defects and Incompatibilities; Product Liability. Products as complex as those offered by the Company may contain defects or failures when introduced or when new versions or enhancements to existing products are released. The Company has in the past discovered software defects and incompatibilities with customers' hardware in certain of its products and may experience delays or lost revenue to correct any new defects in the future. Although the Company has not experienced material adverse effects resulting from any such bugs, defects, failures or incompatibilities to date, there can be no assurance that, despite testing by the Company, errors will not be found in new products or releases after commencement of commercial shipments in the future, which could result in loss of market share or failure to achieve market acceptance. In addition, the Company's products typically go through only one verification cycle prior to beginning volume production and distribution of such products. As a result, the Company's products may contain defects or flaws that are undetected prior to volume production and distribution. The widespread production and distribution of defective products could have a material adverse impact on the Company's business, financial condition or results of operations. See "Business--NVIDIA Architecture, Products and Products under Development." The Company's products are an integrated component of both PCs and business workstations. Although the Company has not experienced any product liability claims to date, the sale and support of products by the Company may entail the risk of such claims. In addition, any failure by the Company's products or software to properly perform could result in claims against the Company by its customers. The Company maintains insurance to protect against certain claims associated with the use of its products, but there can be no assurance that its insurance coverage would adequately cover any claim asserted against the Company. A successful claim brought against the Company that is in excess of, or excluded from, its insurance coverage, could have a material adverse effect on the Company's business, financial condition or results of operations. In addition, even claims that are ultimately unsuccessful could result in the Company's expenditure of funds in litigation and management time and resources. The Company has agreed to indemnify certain of its customers against patent infringement, warranty and certain product defect claims. There can be no assurance that the Company will not be subject to material claims in the future, that such claims will not result in liability in excess of its insurance coverage, that the Company's insurance will cover such claims or that appropriate insurance will continue to be available to the Company in the future at commercially reasonable rates. Erosion of Average Selling Prices. The semiconductor industry, including the 3D graphics processor industry, has been characterized, and is likely to continue to be characterized by, rapid erosion of average selling prices due to a number of factors, including rapid technological change, price/performance enhancements and 17 product obsolescence. The Company anticipates that ASPs and gross margins for its products will decrease over product life cycles, due to competitive pressures and volume pricing agreements. Decreasing ASPs could cause the Company to experience decreased revenue even though the number of units sold is increasing. As a result, the Company may experience substantial period-to- period fluctuations in future operating results due to ASP erosion. Therefore, the Company must continue to develop and introduce on a timely basis next- generation products and enhancements to existing new products that incorporate additional or new features and functionalities and that can be sold at higher ASPs. Failure to achieve the foregoing could cause the Company's revenue and gross margins to decline, which would have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Risks Associated with International Operations. The Company's reliance on foreign third-party manufacturing, assembly and testing operations subjects it to a number of risks associated with conducting business outside of the United States. These risks include unexpected changes in, or impositions of, legislative or regulatory requirements, delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions, longer payment cycles, potentially adverse taxes, the burdens of complying with a variety of foreign laws and other factors beyond the Company's control. The Company also is subject to general political risks in connection with its international trade relationships. Although the Company has not to date experienced any material adverse effect on its business, financial condition or results of operations as a result of such regulatory, political and other factors, there can be no assurance that such factors will not have a material adverse effect on the Company's business, financial condition or results of operations in the future or require the Company to modify its current business practices. In addition, the laws of certain foreign countries in which the Company's products are or may be manufactured or sold, including various countries in Asia, may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of the Company's technology and products more likely. Currently, all of the Company's arrangements with third-party manufacturers provide for pricing and payment in U.S. dollars, and to date the Company has not engaged in any currency hedging activities, although it may do so in the future. Although currency fluctuations have been insignificant to date, there can be no assurance that fluctuations in currency exchange rates will not have a material adverse effect on the Company's business, financial condition or results of operations in the future. Cyclical Nature of the Semiconductor Industry. The semiconductor industry historically has been characterized by rapid technological change, cyclical market patterns, significant ASP erosion, fluctuating inventory levels, alternating periods of overcapacity and capacity constraints, variations in manufacturing costs and yields and significant expenditures for capital equipment and product development. In addition, the industry has experienced significant economic downturns at various times, characterized by diminished product demand and accelerated erosion of ASPs. The Company may experience substantial period-to-period fluctuations in results of operations due to general semiconductor industry conditions. Future Capital Needs; Uncertainty of Additional Funding. If the Company continues to increase production of its products, it will be required to invest significant working capital in inventory and accounts receivable. The Company also intends to continue to invest heavily in research and development for its existing products and for new product development. The Company's future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of expansion of research and product development efforts and the success of these development efforts, the costs and timing of expansion of sales and marketing activities, the extent to which the Company's existing and new products gain market acceptance, competing technological and market developments, the costs involved in maintaining and enforcing patent claims and other intellectual property rights, available borrowings under line of credit arrangements and other factors. The Company believes that the proceeds from this offering, together with the Company's current cash balances and cash generated from operations, will be sufficient to meet the Company's operating and capital requirements for at least the next 12 months. However, there can be no assurance that the Company will not require additional financing within this time frame. The Company may be required to raise additional funds through public or private financing, strategic 18 relationships or other arrangements. There can be no assurance that such additional funding, if needed, will be available on terms attractive to the Company, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require the Company to relinquish its rights to certain of its technologies or products. The failure of the Company to raise capital when needed could have a material adverse effect on the Company's business, financial condition or results of operations. See "--Unpredictable and Fluctuating Operating Results," "--Limited Operating History; History of Losses; No Assurance of Profitability," "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Year 2000 Compliance. Many existing computer systems and applications and other control devices use only two digits to identify a year in the date field, without considering the impact of the upcoming change in the century. As a result, in less than two years, computer systems and applications used by many companies may need to be upgraded to comply with "Year 2000" requirements. Significant uncertainty exists in the computer industry concerning the potential effects associated with such compliance. The Company relies on its systems in operating and monitoring many significant aspects of its business, including financial systems (such as general ledger, accounts payable, accounts receivable, inventory and order management), customer services, infrastructure and network and telecommunications equipment. The Company also relies directly and indirectly on the systems of external business enterprises such as customers, suppliers, creditors, financial organizations and domestic and international governments. The Company currently estimates that its costs associated with Year 2000 compliance, including any costs associated with the consequences of incomplete or untimely resolution of Year 2000 compliance issues, will not have a material adverse effect on the Company's business, financial condition or results of operations in any given year. However, the Company has not extensively investigated and does not believe that it has fully identified the impact of Year 2000 compliance and has not concluded that it can resolve any issues that may arise in complying with Year 2000 without disruption of its business or without incurring significant expense. In addition, even if the Company's internal systems are not materially affected by Year 2000 compliance issues, the Company could be affected through disruption in the operation of the enterprises with which the Company interacts. There can be no assurance that the Company's products will be Year 2000 compliant, that third-party products with which the Company's products interface will be Year 2000 compliant or that any changes to third-party products made in response to Year 2000 compliance issues will not render the Company's products incompatible with such third-party products. Control by Existing Stockholders. Upon completion of this offering, the Company's executive officers and directors, together with entities affiliated with such individuals, will beneficially own approximately % of the Company's Common Stock (approximately % if the Underwriters' over-allotment option is exercised in full). Accordingly, these stockholders will be able to exercise control over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. These transactions include proxy contests, mergers involving the Company, tender offers, open market purchase programs or other purchases of Common Stock that could give stockholders of the Company the opportunity to realize a premium over the then-prevailing market price for their shares of Common Stock. See "Principal Stockholders." Absence of Prior Trading Market; Potential Volatility of Stock Price. Prior to this offering, there has been no public market for the Common Stock. There can be no assurance that an active trading market will develop or, if one develops, that it will be maintained. The initial public offering price of the Common Stock will be established by negotiation among the Company and the Underwriters. See "Underwriters" for factors to be considered in determining the initial public offering price. The market price of the shares of Common Stock could be subject to significant fluctuations in response to the Company's operating results, announcements of new products by the Company or its competitors, and other factors, including general economic and market conditions. In addition, the stock market in recent years has experienced and continues to experience extreme price and volume fluctuations, which have affected the market price of the stock of many companies, and particularly 19 technology companies, and which have often been unrelated or disproportionate to the operating performance of these companies. These fluctuations, as well as a shortfall in sales or earnings compared to securities analysts expectations, changes in analysts recommendations or projections or general economic and market conditions, may adversely affect the market price of the Common Stock. In the past, securities class action litigation has often been instituted following periods of volatility in the market price for a company's securities. Such litigation could result in substantial costs and a diversion of management attention and resources, which could have a material adverse effect on the Company's business, financial condition or results of operations. Anti-Takeover Provisions. The Company's Certificate of Incorporation (the "Certificate") authorizes the Board of Directors to issue up to 2,000,000 shares of Preferred Stock and to determine the powers, designations, preferences, rights, qualifications, limitations and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The Certificate and Bylaws, among other things, provide for a classified Board of Directors, require that stockholder actions occur at duly called meetings of the stockholders, limit who may call special meetings of stockholders and require advance notice of stockholder proposals and director nominations. These and other provisions could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company, discourage a hostile bid or delay, prevent or deter a merger, acquisition or tender offer in which the Company's stockholders could receive a premium for their shares, or a proxy contest for control of the Company or other change in the Company's management. See "Management" and "Description of Capital Stock." Shares Eligible for Future Sale. The sale of a substantial number of shares of Common Stock in the public market following this offering could adversely affect the market price of the Common Stock. Upon the closing of this offering, the Company will have outstanding an aggregate of shares of Common Stock, assuming no exercise of outstanding options and warrants, of which 23,468,797 shares of Common Stock are "Restricted Shares" subject to restrictions under the Securities Act of 1933, as amended (the "Securities Act"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act. Holders of certain shares of the Company's Common Stock, including all officers and directors, have agreed (the "Lock-Up Agreements"), subject to certain exceptions, not to offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (whether such shares or any such securities are then owned by such person or are thereafter acquired directly from the Company), or to enter into any swap or similar arrangement that transfers, in whole or in part, the economic risks of ownership of the Common Stock (a "disposition"), without the prior written consent of Morgan Stanley & Co. Incorporated for a period of 180 days after the date of this Prospectus. As a result of such contractual restrictions and the provisions of Rule 144 and 701, the Restricted Shares will be available for sale in the public market as follows: (i) 47,500 shares will be eligible for immediate sale on the date of this Prospectus; (ii) 4,952,500 shares will be eligible for sale 90 days after the date of this Prospectus; (iii) 17,365,771 shares will be eligible for sale upon expiration of lock-up agreements 180 days after the date of this Prospectus and (iv) the remaining shares will be eligible for sale from time to time thereafter upon expiration of the Company's right to repurchase such shares. In addition, certain stockholders of the Company have the right to register shares of Common Stock for sale in the public market, and the Company intends to register shares of Common Stock authorized for issuance under the Company's equity incentive plans shortly following the closing of this offering. See "Description of Capital Stock" and "Shares Eligible for Future Sale." Dilution; Absence of Cash Dividends. Purchasers of the shares of Common Stock offered hereby will experience immediate and substantial dilution in the net tangible book value of their investment from the initial public offering price. Additional dilution will occur upon exercise of outstanding options and warrants. See "Dilution" and "Shares Eligible for Future Sale." The Company has never paid any dividends and does not anticipate paying dividends in the foreseeable future. See "Dividend Policy." 20 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered by the Company hereby are estimated to be approximately $ ($ if the Underwriters' over-allotment option is exercised in full), at an assumed initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company intends to use approximately $10- 12 million of the net proceeds to repay certain accounts payable. The balance of the net proceeds will be used for general corporate purposes, including capital expenditures and working capital. The Company expects to spend approximately $10 million for capital expenditures in 1998, primarily for capital leases and the purchase of computer and engineering workstations. Such capital expenditures are expected to be funded by a portion of the net proceeds from this offering, together with existing cash balances and anticipated cash flow from operations. The amounts and timing of the Company's actual expenditures will depend upon numerous factors, including the status of the Company's research and development efforts, the amount of cash generated by the Company's operations, the level of the Company's sales and marketing activities and the impact of competition. Pending such uses, the Company intends to invest the net proceeds of this offering in short-term, investment- grade, interest-bearing securities. DIVIDEND POLICY The Company has never paid any cash dividends on its capital stock and does not anticipate paying cash dividends for the foreseeable future. 21 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 29, 1998 (i) on an actual basis, (ii) on a pro forma basis giving effect to the conversion of all outstanding shares of Preferred Stock into shares of Common Stock upon the closing of this offering and (iii) on a pro forma as adjusted basis to reflect the receipt by the Company of the estimated net proceeds from the sale of the shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company.
MARCH 29, 1998 -------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS) Capital lease obligations, less current portion....................................... $ 2,143 $ 2,143 $ -------- -------- ----- Stockholders' equity: Preferred Stock, $.001 par value; actual-- 10,000,000 shares authorized, 9,327,087 shares issued and outstanding; pro forma and pro forma as adjusted-- 2,000,000 shares authorized, no shares issued and outstanding................................. 9 -- -- Common Stock, $.001 par value; 200,000,000 shares authorized; actual--14,141,710 shares issued and outstanding; pro forma-- 23,468,797 shares issued and outstanding; pro forma as adjusted-- shares issued and outstanding(1).......................... 14 23 Additional paid-in capital................... 23,211 23,211 Deferred compensation........................ (2,166) (2,166) Accumulated deficit.......................... (11,811) (11,811) -------- -------- ----- Total stockholders' equity................. 9,257 9,257 -------- -------- ----- Total capitalization..................... $ 11,400 $ 11,400 $ ======== ======== =====
- -------- (1) Excludes (i) 6,066,833 shares of Common Stock issuable upon the exercise of options outstanding at a weighted average exercise price of $3.91 per share, (ii) 158,806 shares of Common Stock issuable upon the exercise of warrants outstanding at a weighted average exercise price of $2.10 per share, (iii) 3,911,457 shares reserved for future grants under the Company's 1998 Equity Incentive Plan, (iv) 300,000 shares reserved for future grants under the Company's 1998 Non-Employee Directors' Stock Option Plan, (v) 500,000 shares reserved for issuance under the Company's 1998 Employee Stock Purchase Plan and (vi) 131,750 shares of Common Stock issuable upon exercise of options granted after March 29, 1998. See "Management--Employee Benefit Plans" and Notes 3 and 8 of Notes to Financial Statements. 22 DILUTION The pro forma net tangible book value of the Company as of March 29, 1998 was approximately $9.3 million or $.39 per share of Common Stock. Pro forma net tangible book value per share is equal to the Company's total tangible assets less its total liabilities divided by the number of shares of Common Stock outstanding (assuming the conversion of all outstanding shares of Preferred Stock into Common Stock). After giving effect to the sale by the Company of the shares of Common Stock offered hereby (at an assumed initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company), the as adjusted net tangible book value of the Company as of March 29, 1998 would have been $ million, or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new public investors. The following table illustrates this per share dilution: Assumed initial public offering price per share.................... $ Pro forma net tangible book value per share as of March 29, 1998............................................................ $.39 Increase in pro forma net tangible book value per share attributable to new public investors............................ ---- As adjusted net tangible book value per share after the offering... --- Dilution per share to new public investors......................... $ ===
The following table summarizes, on a pro forma basis as of March 29, 1998, the difference between the number of shares of Common Stock purchased from the Company (assuming the conversion of all outstanding shares of Preferred Stock into Common Stock), the total cash consideration paid and the average price per share paid by the existing stockholders and by the new public investors (at an assumed initial public offering price of $ per share and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company):
AVERAGE SHARES PURCHASED TOTAL CONSIDERATION PRICE ------------------ ------------------- PER NUMBER PERCENT AMOUNT PERCENT SHARE ---------- ------- ----------- ------- ------- Existing stockholders............ 25,669,630 % $23,008,467 % $.90 New public investors............. ---------- ------ ----------- ------ Total.......................... 100.0% $ 100.0% ========== ====== =========== ======
The immediately foregoing table includes 2,221,833 shares of Common Stock issuable upon the exercise of outstanding stock options immediately exercisable as of March 29, 1998 with a weighted average exercise price of $1.05 per share. The foregoing excludes 3,845,000 shares issuable upon exercise of outstanding options not immediately exercisable with a weighted average exercise price of $5.56 per share and 158,806 shares of Common Stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $2.10 per share. To the extent that outstanding options or warrants are exercised, there will be further dilution to new investors. See "Management--Employee Benefit Plans" and Note 3 of Notes to Financial Statements. 23 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Company's financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein. The statement of operations data for the years ended December 31, 1995, 1996 and 1997 and the balance sheet data as of December 31, 1996 and 1997 have been derived from and should be read in conjunction with the audited financial statements of the Company and the notes thereto included elsewhere in this Prospectus that have been audited by KPMG Peat Marwick LLP, independent auditors. The statement of operations data for the period from inception (April 5, 1993) to December 31, 1993 and the year ended December 31, 1994 are derived from audited financial statements and the notes thereto not included in this Prospectus. The balance sheet data as of December 31, 1993, 1994 and 1995 are derived from audited financial statements and the notes thereto not included in this Prospectus. The selected statement of operations data for the quarters ended March 30, 1997 and March 29, 1998 and the selected balance sheet data as of March 29, 1998 are derived from unaudited financial statements included elsewhere in this Prospectus that have been prepared on the same basis as the audited financial statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation as of such date. The operating results for the quarter ended March 29, 1998 are not necessarily indicative of the results to be expected for any other interim period or any future fiscal year.
PERIOD FROM YEAR ENDED DECEMBER 31, QUARTER ENDED INCEPTION ---------------------------------- ------------------- (APRIL 5, 1993) TO MARCH 30, MARCH 29, DECEMBER 31, 1993 1994 1995 1996 1997 1997 1998 ------------------ ------- ------- ------- ------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Total revenue........................... $ -- $ -- $ 1,182 $ 3,912 $29,071 $ 65 $ 37,662 Cost of revenue......................... -- -- 1,549 3,038 21,226 208 27,559 ------- ------- ------- ------- ------- ------- -------- Gross profit (loss)..................... -- -- (367) 874 7,845 (143) 10,103 Operating expenses: Research and development................ 204 361 2,426 1,218 6,632 616 3,815 Sales, general and administrative....... 302 990 3,677 2,649 3,773 385 3,341 ------- ------- ------- ------- ------- ------- -------- Total operating expenses................ 506 1,351 6,103 3,867 10,405 1,001 7,156 ------- ------- ------- ------- ------- ------- -------- Operating income (loss)................. (506) (1,351) (6,470) (2,993) (2,560) (1,144) 2,947 Interest and other income (expense), net 22 (10) 93 (84) (131) (32) (39) ------- ------- ------- ------- ------- ------- -------- Income (loss) before income tax expense. (484) (1,361) (6,377) (3,077) (2,691) (1,176) 2,908 Income tax expense...................... -- -- -- -- -- -- 728 ------- ------- ------- ------- ------- ------- -------- Net income (loss)....................... $ (484) $(1,361) $(6,377) $(3,077) $(2,691) $(1,176) $ 2,180 ======= ======= ======= ======= ======= ======= ======== Basic net income (loss) per share(1).... $ (.07) $ (.19) $ (.56) $ (.27) $ (.21) $ (.10) $ .15 ======= ======= ======= ======= ======= ======= ======== Diluted net income (loss) per share..... $ (.07) $ (.19) $ (.56) $ (.27) $ (.21) $ (.10) $ .08 ======= ======= ======= ======= ======= ======= ======== Shares used in basic and diluted per share computation(1)................... 6,784 7,048 11,365 11,383 12,677 11,578 14,142 Shares used in diluted per share computation(1)......................... 6,784 7,048 11,365 11,383 12,677 11,578 25,729
DECEMBER 31, ----------------------------------- MARCH 29, 1993 1994 1995 1996 1997 1998 ------ ------ ------ ------ ------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents........ $1,605 $4,555 $3,872 $3,133 $ 6,551 $ 8,640 Total assets..................... 1,786 5,450 6,793 5,525 25,038 36,738 Capital lease obligations, less current portion................. 76 249 1,137 617 1,891 2,143 Total stockholders' equity....... 1,659 4,629 4,013 1,037 6,896 9,257
- -------- (1) See Note 1 of Notes to Financial Statements for an explanation of the determination of the number of shares used in per share computations. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's financial statements and notes thereto and the other financial information included elsewhere in this Prospectus. Except for the historical information contained herein, the discussions in this Prospectus contain forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and in the section entitled "Risk Factors," as well as those discussed elsewhere in this Prospectus. OVERVIEW NVIDIA designs, develops and markets 3D graphics processors that provide high performance interactive 3D graphics to the mainstream PC market. The Company incurred losses in each quarter from inception through the third quarter of 1997 and in each year. As of March 29, 1998, the Company had an accumulated deficit of approximately $11.8 million. Since its inception in April 1993 through the end of 1994, NVIDIA was in the development stage and was primarily engaged in product development and product testing. The Company introduced its first product, the NV1, in May 1995. The NV1 was a multimedia accelerator that provided 3D graphics, video and audio for interactive multimedia, and was targeted primarily to the game console market. The NV1 was developed in the absence of industry standards with the goal of establishing the Company's proprietary NV technology as a 3D graphics standard. By the end of 1996, the PC industry had broadly adopted Microsoft's Direct3D and SGI's OpenGL 3D APIs. As a result, the Company experienced a significant reduction in revenue from sales of the NV1 and stopped selling the NV1 in the first quarter of 1996. The Company also ceased development of the NV2, a product designed for a game console platform, and began developing the RIVA128 graphics processor. In August 1997, the Company introduced the RIVA128 graphics processor, which is designed to be compatible with Microsoft's Direct3D and is the first in a family of high performance graphics products targeted at the mainstream PC market. All of the Company's revenue in 1995 and 1996 was derived from the sale and license of the NV1, and substantially all of the Company's revenue in 1997 and the first quarter of 1998 was derived from the sale and license of the RIVA128 graphics processor. The Company expects that substantially all of its revenue for the foreseeable future will be derived from the sale and license of its 3D graphics processors in the mainstream PC market. The Company recognizes product sales revenue upon shipment, net of allowances and recognizes royalty revenue upon shipment of product to the licensee's customers. Since the Company has no other product line, the Company's business, financial condition and results of operations would be materially adversely affected if for any reason its graphics processors do not achieve widespread acceptance in the mainstream PC market. A majority of the Company's sales have been to a limited number of customers and its sales are highly concentrated. The Company sells its graphics processors to add-in board manufacturers, primarily Diamond and STB, which incorporate these processors in the boards they sell to PC OEMs, retail outlets and systems integrators. The average selling prices for the Company's products, as well as its customers' products, vary by distribution channel. All of the Company's sales are made on the basis of purchase orders rather than long-term agreements. Diamond accounted for 86% and 82% of the Company's total revenue in 1995 and 1996, respectively. STB and Diamond accounted for 63% and 31%, respectively, of the Company's total revenue in 1997, and 49% and 39%, respectively, of the Company's total revenue in the first quarter of 1998. The number of potential customers for the Company's products is limited, and the Company expects that sales to STB and Diamond will continue to account for a substantial portion of its revenue for the foreseeable future. Currently, all of the Company's product sales and its arrangements with its third-party manufacturers provide for pricing and payment in U.S. dollars, and the Company has not engaged in any foreign currency hedging activities, although it may do so in the future. As markets for the Company's 3D graphics processors develop and competition increases, the Company anticipates that product life cycles will remain short and ASPs will continue to decline. In particular, ASPs and 25 gross margins for the Company's 3D graphics processors are expected to decline as each product matures. The Company's add-in board manufacturers and major OEM customers typically introduce new system configurations as often as twice per year, typically based on spring and fall design cycles. Accordingly, the Company's existing products must have competitive performance levels in order to be included in new system configurations, or the Company must timely introduce new products with such performance characteristics. The Company's RIVA128 graphics processor was designed into products introduced in the fall of 1997. While the Company expects to continue to sell the RIVA128 graphics processor, as a result of increased competition from new products introduced by both the Company and its competitors for the 1998 design cycles, the Company expects revenues from the RIVA128 graphics processor in future periods to decline substantially from the levels in the first quarter of 1998. Thus, the Company will need to introduce new products and enhancements to existing products to maintain overall average selling prices and gross margins. Furthermore, in order for the Company's 3D graphics processors to achieve high volumes, leading PC OEMs and add-in board manufacturers must select the Company's 3D graphics processor for design into their products, and then successfully complete the designs of their products and sell them. In particular, the Company expects to begin volume shipments of the RIVA128ZX graphics processor in the second quarter of 1998, and there can be no assurance that the Company will be able to successfully manage the production transition risks with respect to that product. Failure to achieve any of the foregoing with respect to the RIVA128ZX graphics processor, future products or product enhancements could result in rapidly declining ASPs, reduced margins, reduced demand for products or loss of market share, any of which could have a material adverse effect on the Company's business, financial condition or results of operations. In addition, demand for the Company's products has been and will continue to be significantly affected by actual and anticipated changes in the price and supply of DRAM products or other components used with PC graphics processors. Recently, large supplies of SDRAMs resulted in significant price declines for such components. This price decrease has lowered the total system cost to customers of competitive products that use such SDRAMS, as compared to the Company's RIVA128 graphics processor, which is designed to operate using only SGDRAMS, which are relatively more expensive than SDRAMs. The Company expects that such unfavorable price competition may negatively impact sales of the Company's products. The Company expects to release a version of its RIVA128ZX graphics processor shortly that will operate either with SDRAMS or SGDRAMS. There can be no assurance that the Company will be successful in designing the RIVA128ZX graphics processor to operate with SDRAMS or that future fluctuations in price of components used by customers of PC graphics processors will not have a material adverse effect on the Company's business, financial condition or results of operations. See "Risk Factors--Dependence upon Acceptance of the Company's 3D Graphics Solution for the Mainstream PC Market," "--Dependence on New Product Development; Need to Manage Product Transitions and "--Importance of Design Wins." The Company utilizes ST and TSMC to produce the Company's semiconductor wafers and independent contractors to perform assembly, test and packaging. The Company depends on these suppliers to allocate to the Company a portion of their manufacturing capacity sufficient to meet the Company's needs, to produce products of acceptable quality and at acceptable manufacturing yields and to deliver those products to the Company on a timely basis. ST currently is capacity constrained with respect to the manufacture of the Company's products. ST has only recently begun to manufacture the Company's products in commercial quantities, and there can be no assurance that ST will be able to meet the Company's near-term or long-term manufacturing requirements. In addition, the Company's relationship with TSMC has only recently been established, and there can be no assurance that this relationship will meet the business objectives of the Company. As the Company's relationships with ST, TSMC and any additional manufacturing partners develop, yields or product performance could be adversely affected due to difficulties associated with adapting the Company's technology and product design to the proprietary process technology and design rules of each manufacturer. A manufacturing disruption experienced by either of these manufacturers would impact the production of the Company's products, which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company obtains manufacturing services from both ST and TSMC on a purchase order basis, and neither ST nor TSMC has any obligation to provide the Company with any specified minimum quantities of product. Both ST and TSMC fabricate wafers for other companies, including certain competitors of the Company, and ST also manufactures wafers for its own needs, and either could choose to prioritize capacity for other uses or 26 reduce or eliminate deliveries to the Company on short notice. In addition, the Company purchases wafers and dies and pays an agreed price for wafers meeting certain acceptance criteria only after the production yields for a product stabilize. Once production is stabilized, the Company will pay for functional die only. Accordingly, because TSMC has only recently begun to manufacture products for the Company, until the production yields of its product at TSMC stabilize, the Company must pay an agreed price for wafers regardless of yield. See "Risk Factors--Dependence on Third-Party Manufacturers; Absence of Manufacturing Capacity; Manufacturing Risks" and "-- Manufacturing Yields." The Company has in the past entered into contractual agreements with third parties to provide design, development and support services on a best efforts basis. All amounts funded to the Company under these agreements were non-refundable once paid. The Company recorded reductions to research and development expense based on the percentage-of-completion method, limited by the amounts funded, and recorded primarily as a reduction to research and development expenses. The Company developed the NV2 under contract with a third party and recorded a credit to research and development of $2.0 million in 1995 and $3.0 million in 1996. Also, as part of a strategic collaboration agreement with ST, the Company received contract funding in support of research and development and marketing efforts for the RIVA128 and RIVA128ZX graphics processors. Accordingly, the Company recorded $2.0 million in 1996 and approximately $2.3 million in 1997 as a reduction primarily to research and development, and, to a lesser extent to sales, general and administrative expenses. The Company is obligated to provide continued development and support to ST through the end of 1998. The Company recorded $625,000 for continued development and support in the first quarter of 1998 and expects to record a similar amount in each of the remaining three quarters of 1998. The Company does not have any plans to enter into contractual development arrangements and does not expect contract funding in the future. RESULTS OF OPERATIONS The Company first generated revenue from sales of its current 3D graphics processor product in the third quarter of 1997, when the Company began commercial shipment of the RIVA128 graphics processor. Prior to that time, the Company's revenue was derived from the sale of products that were targeted at the game console market. These products were discontinued in 1996 due to their proprietary standards and market changes. Moreover, expenses prior to the third quarter of 1997 related primarily to product development and product testing. QUARTERS ENDED MARCH 30, 1997 AND MARCH 29, 1998 REVENUE Product Revenue. Product revenue increased from $65,000 in the first quarter of 1997 to $33.2 million in the first quarter of 1998, due to sales of the RIVA128 graphics processor, which the Company introduced in August 1997. Although the Company achieved substantial growth in product revenue from the 1997 period to the 1998 period, the Company does not expect to sustain this rate of growth in future periods. In addition, the Company expects that the average selling prices of its products will decline over the respective lives of such products, and there can be no assurance that declines in average selling prices of 3D graphics processors will not accelerate as the market develops and competition increases. See "Risk Factors--Erosion of Average Selling Prices." Royalty Revenue. ST has a license from the Company to sell the NV1 multimedia accelerator and the RIVA128 and RIVA128ZX graphics processors. Royalty revenue from ST's sales of the RIVA128 graphics processor increased to $4.5 million in the first quarter of 1998 as a result of the Company's introduction of the RIVA128 graphics processor in August 1997 and subsequent sales of the RIVA128 graphics processor by ST. Although the Company achieved substantial growth in royalty revenue from 1997 to 1998, the Company expects royalty revenue from ST to decrease in the second quarter of 1998 and beyond. If ST were to stop selling the Company's products, if there continued to be a material decline in the number of units sold by ST in the future or if there were a greater than expected decline in the ASPs of the Company's products sold by ST, the 27 Company's business, financial condition and results of operations would be materially adversely affected. See "Risk Factors--Dependence on ST Microelectronics." GROSS PROFIT (LOSS) Gross profit consists of total revenue less cost of revenue. Cost of revenue consists primarily of the costs of semiconductors purchased from the Company's contract manufacturers, manufacturing support costs (labor and overhead associated with such purchases) and shipping costs. The Company had a gross loss of $143,000 in the first quarter of 1997 compared to a gross profit of $10.1 million in the first quarter of 1998. Excluding royalty revenue, gross margin on product revenue improved from (219)% in the first quarter of 1997 to 17% in the first quarter of 1998 due to sales of the RIVA128 graphics processor. Although the Company achieved substantial growth in gross profit and gross margin from the 1997 period to the 1998 period, the Company does not expect to sustain these rates of growth in future periods. Gross profit or gross margin could be affected in the future by various factors, including changes in the volume of the Company's products, competitive pressures resulting in lower than expected ASPs, reduction in the amount of royalty revenue received from ST and inventory write-downs. OPERATING EXPENSES Research and Development. Research and development expenses consist primarily of salaries and benefits, cost of development tools and software, and consultant costs, net of contract funding from ST. Research and development expenses before adjustments for contract funding increased from $616,000 in the first quarter of 1997 to $3.8 million in the first quarter of 1998, primarily due to additional personnel and related costs, such as depreciation changes incurred on capital expenditures and software license and maintenance fees. The Company anticipates that it will continue to devote substantial resources to research and development and that these expenses will exceed $3.8 million, net of contract funding from ST, in each of the remaining three quarters of 1998. Sales, General and Administrative. Sales, general and administrative expenses consist primarily of salaries, commissions and bonuses earned by sales, marketing and administrative personnel, promotional and advertising expenses, and travel and entertainment, net of contract funding received from ST. Sales, general and administrative expenses increased from $385,000 in the first quarter of 1997 to $3.3 million in the first quarter of 1998, primarily due to increased promotional expenses, additional personnel and commissions and bonuses on sales of the RIVA128 graphics processor. The Company expects that sales and marketing expenses will continue to increase in absolute dollars as the Company expands its sales and marketing efforts and increases promotional activities, and that general and administrative expenses will increase in connection with expenses related to the SGI and S3 patent lawsuits until such lawsuits are resolved, expenses associated with being a public company and the Company's expected move to a larger facility in the third quarter of 1998. INTEREST AND OTHER INCOME (EXPENSE), NET Interest expense primarily consists of interest incurred as a result of capital lease obligations. Interest expense increased from $54,000 in the first quarter of 1997 to $83,000 in the first quarter of 1998, primarily as a result of additional equipment leased in support of the Company's development activities. Interest income primarily consists of interest earned on the Company's cash and cash equivalents. Interest income was $22,000 and $44,000 in the first quarter of 1997 and 1998, respectively. Interest income was higher in the first quarter of 1998 due to higher average cash balances as a result of the Company's receipt of net proceeds from the sale of preferred stock in August 1997 and net cash provided by operating activities in the two quarters ended March 29, 1998. PROVISION FOR INCOME TAXES The Company recorded no provision for federal or state income taxes through 1997 because the Company experienced net losses from inception through 1997. The Company expects to record a provision for income taxes in 1998, the amount of which will depend on several factors, including the availability of net operating loss carryforwards and research and development carryforwards. Future equity offerings combined with sales of 28 the Company's equity during the preceding three years may constitute changes in ownership under the Internal Revenue Code of 1986, and could limit the use of the Company's net operating loss carryforwards existing as of the date of the ownership change. Realization of the deferred tax assets also will depend on future taxable income. FISCAL YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 REVENUE Product Revenue. Product revenue was $1.1 million, $3.7 million and $27.3 million in 1995, 1996 and 1997, respectively. Prior to 1997, product revenue was derived from sales of the Company's NV1 processor. The substantial increase in product revenue from 1996 to 1997 was due to sales of the RIVA128 graphics processor, which the Company introduced in August 1997. Although the Company achieved substantial growth in product revenue in 1996 and 1997, the Company does not expect to sustain this rate of sequential annual growth in future periods. Royalty Revenue. Royalty revenue was $79,000, $202,000 and $1.8 million in 1995, 1996 and 1997, respectively. Royalty revenue increased in 1997 as a result of the Company's introduction of the RIVA128 graphics processor in August 1997 and subsequent sales of the RIVA128 graphics processor by ST. Although the Company achieved substantial growth in royalty revenue from 1996 to 1997, the Company does not expect to sustain this rate of sequential annual growth in future periods. GROSS PROFIT (LOSS) The gross loss of $367,000 in 1995 was attributable to fixed manufacturing support costs in a period of low product sales. Increased sales and slightly lower fixed manufacturing costs contributed to a gross profit of $874,000 in 1996. The introduction of the RIVA128 graphics processor in August 1997 and subsequent sales contributed to a gross profit of $7.9 million in 1997. Excluding royalty revenue, gross margin on product revenue was (40)%, 18% and 22% in 1995, 1996 and 1997, respectively. The increase in gross margin on product revenue in 1997 was primarily due to sales of the RIVA128 graphics processor. Although the Company achieved substantial growth in gross profit and moderate growth in gross margin from 1996 to 1997, the Company does not expect to sustain these rates of sequential annual growth in future periods. OPERATING EXPENSES Research and Development. Research and development expenses before adjustments for contract funding were $4.4 million, $5.8 million and $8.6 million in 1995, 1996 and 1997, respectively. Research and development expenses increased each year primarily due to additional personnel and related costs. Sales, General and Administrative. Sales, general and administrative expenses decreased from $3.7 million in 1995 to $2.6 million in 1996 as the Company curtailed promotional activities associated with the NV1. Sales, general and administrative expenses increased to $3.8 million in 1997 primarily due to incremental promotional expenses, additional personnel and commissions and bonuses on sales of the RIVA128 graphics processor. INTEREST AND OTHER INCOME (EXPENSE), NET Interest expense was $152,000, $216,000 and $267,000 in 1995, 1996 and 1997, respectively. Interest expense increased each year as a result of additional equipment leased in support of the Company's development activities. Interest income was $245,000, $132,000 and $136,000 in 1995, 1996 and 1997, respectively. Interest income was higher in 1995 due to higher average cash balances during the year as a result of the Company's receipt of net proceeds from the sale of preferred stock. PROVISION FOR INCOME TAXES. No provision for federal or state income tax was recorded because the Company experienced net losses from inception through 1997. As of December 31, 1997, the Company had deferred tax assets for federal tax purposes of approximately $6.3 million, primarily consisting of net operating loss carryforwards that can be used to offset taxable income in future years. The deferred tax assets are fully offset by a valuation allowance. 29 QUARTERLY RESULTS OF OPERATIONS The following table presents certain quarterly statement of operations data for the five quarters ended March 29, 1998. This quarterly information is unaudited, but has been prepared on the same basis as the audited annual financial statements, and in the opinion of the Company's management includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. The unaudited quarterly information should be read in conjunction with the Company's audited financial statements and the notes thereto included elsewhere herein. The growth in revenue and improvement in results of operations experienced by the Company in recent quarters are not necessarily indicative of future results. In addition, in light of its significant growth in recent quarters, the Company believes that period-to-period comparisons of its financial results should not be relied upon as an indication of future performance.
QUARTER ENDED ------------------------------------------------- MARCH 30, JUNE 29, SEPT. 28, DEC. 31, MARCH 29, 1997 1997 1997 1997 1998 --------- -------- --------- -------- --------- STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue: Product...................... $ 65 $ 6 $ 5,154 $22,055 $33,210 Royalty...................... -- -- 312 1,479 4,452 ------- ------- ------- ------- ------- Total revenue.............. 65 6 5,466 23,534 37,662 ------- ------- ------- ------- ------- Cost of revenue................ 208 150 4,546 16,322 27,559 Gross profit (loss)........ (143) (144) 920 7,212 10,103 Operating expenses: Research and development..... 616 512 2,312 3,192 3,815 Sales, general and administrative.............. 385 569 991 1,828 3,341 ------- ------- ------- ------- ------- Total operating expenses... 1,001 1,081 3,303 5,020 7,156 ------- ------- ------- ------- ------- Operating income (loss)........ (1,144) (1,225) (2,383) 2,192 2,947 Interest and other income (expense), net................ (32) (40) (30) (29) (39) ------- ------- ------- ------- ------- Income (loss) before tax expense....................... (1,176) (1,265) (2,413) 2,163 2,908 Income tax expense............. -- -- -- -- 728 ------- ------- ------- ------- ------- Net income (loss).......... $(1,176) $(1,265) $(2,413) $ 2,163 $ 2,180 ======= ======= ======= ======= ======= Basic net income (loss) per share......................... $ (.10) $ (.11) $ (.18) $ .15 $ .15 ======= ======= ======= ======= ======= Diluted net income (loss) per share......................... $ (.10) $ (.11) $ (.18) $ .09 $ .08 ======= ======= ======= ======= ======= Shares used in basic per share computation................... 11,578 11,662 13,328 14,074 14,142 Shares used in diluted per share computation............. 11,578 11,662 13,328 24,942 25,729
FACTORS AFFECTING OPERATING RESULTS The Company's quarterly and annual results of operations will be affected by a variety of factors that could materially adversely affect revenue, gross profit and results of operations. Factors that have affected the Company's results of operations in the past, and are likely to affect the Company's results of operations in the future, include, among others, demand and market acceptance of the Company's products; the successful development of next- generation products; unanticipated delays or problems in the introduction or performance of next-generation products; market acceptance of the products of the Company's customers; new product announcements or product introductions by the Company's competitors; the Company's ability to introduce new products in accordance with OEM design requirements and design cycles; changes in the timing of product orders due to unexpected delays in the introduction of products of the Company's customers or due to the life cycles of such customers' products ending earlier than anticipated; fluctuations in the availability of manufacturing capacity or manufacturing yields; competitive pressures resulting in lower than expected average 30 selling prices; the volume of orders that are received and that can be fulfilled in a quarter; the rescheduling or cancellation of customer orders; the unanticipated termination of a strategic relationship; seasonal fluctuations associated with the tendency of PC sales to decrease in the second quarter and increase in the second half of zeach calendar year; and the level of expenditures for research and development of sales, general and administrative functions of the Company. For example, the Company began shipping the RIVA128ZX graphics processor in March 1998, and experienced difficulties in achieving volume production. The Company believes that these production issues have been resolved, and the Company began volume production in the second quarter of 1998. However, there can be no assurance that the Company will not experience difficulties related to the production of current or future products or that other factors will not delay the introduction or volume sale of new products developed by the Company. The Company believes that quarterly and annual results of operations also could be affected in the future by other factors, including changes in the relative volume of sales of the Company's products; seasonality in the PC market; the ability of the Company to reduce the process geometry of its products; supply constraints for the other components incorporated into its customers' products; the loss of a key customer; a reduction in the amount of royalties received from ST; changes in the pricing of DRAMs or other components; legal and other costs related to defending intellectual property litigation; costs associated with protecting the Company's intellectual property; inventory write-downs and foreign exchange rate fluctuations. Any one or more of these factors could result in the Company failing to achieve its expectations as to future revenue or net income. For example, in December 1997, the Company's sales of the RIVA128 graphics processor were negatively affected due to low manufacturing yields at ST, the Company's sole manufacturer of the RIVA128 graphics processor. Any similar manufacturing difficulties with ST or other third-party manufacturers in the future could have a material adverse impact on the Company's business, financial condition or results of operations. Because most operating expenses are relatively fixed in the short term, the Company may be unable to adjust spending sufficiently in a timely manner to compensate for any unexpected sales shortfall, which could materially adversely affect quarterly results of operations. The Company will be required to reduce prices in response to competition or to pursue new market opportunities. If new competitors, technological advances by existing competitors or other competitive factors require the Company to invest significantly greater resources than anticipated in research and development or sales and marketing efforts, the Company's business, financial condition and results of operations could be materially adversely affected. Accordingly, the Company believes that period-to-period comparisons of its results of operations should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year. As a result of fluctuating operating results or other factors discussed above, in certain future quarters the Company's results of operations may be below the expectations of public market analysts or investors. In such event, the market price of the Company's Common Stock would be materially adversely affected. In 1997 and the first quarter of 1998, the Company derived all of its revenue from the sale or license of products for use in PCs, and the Company expects to continue to derive substantially all of its revenue from the sale or license of products for use in PCs. As a result, failure of the demand for 3D graphics in the mainstream PC market to increase, or reductions or fluctuations in the demand for PCs, would have a material adverse effect on the Company's business, financial condition and results of operations. The PC industry is seasonal, and the Company expects that its financial results in the future will be affected by such seasonality. LEGAL PROCEEDINGS SGI filed a patent infringement lawsuit against the Company in April 1998 and S3 filed a patent infringement lawsuit against the Company in May 1998. In the event of an adverse result in either the SGI suit or the S3 suit, the Company could be required to do one or more of the following: pay substantial damages (including treble damages); preliminarily and/or permanently cease the manufacture, use and sale of any infringing products; expend significant resources to develop non-infringing technology; or obtain a license from SGI or S3 for any infringing technology. Either suit could result in limitations on the Company's ability to market its products, delays and costs associated with redesigning its products or payments of license fees or other payments to SGI or S3, any of which would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Legal Proceedings." 31 STOCK-BASED COMPENSATION With respect to certain stock options granted to employees, the Company recorded deferred compensation of $2.1 million in 1997 and $305,000 in the first quarter of 1998. The Company amortized approximately $62,000 of the deferred compensation in the fourth quarter of 1997 and $177,000 in the first quarter of 1998 and will amortize the remainder over the four-year vesting periods of the options. See Note 3 of Notes to Financial Statements. YEAR 2000 COMPLIANCE Many existing computer systems and applications and other control devices use only two digits to identify a year in the date field, without considering the impact of the upcoming change in the century. As a result, in less than two years, computer systems and applications used by many companies may need to be upgraded to comply with "Year 2000" requirements. The Company relies on its systems in operating and monitoring many significant aspects of its business, including financial systems (such as general ledger, accounts payable, accounts receivable, inventory and order management), customer services, infrastructure and network and telecommunications equipment. The Company also relies directly and indirectly on the systems of external business enterprises such as customers, suppliers, creditors, financial organizations and domestic and international governments. The Company currently estimates that its costs associated with Year 2000 compliance, including any costs associated with the consequences of incomplete or untimely resolution of Year 2000 compliance issues, will not have a material adverse effect on the Company's business, financial condition or results of operations. However, the Company has not extensively investigated and does not believe it has fully identified the impact of Year 2000 compliance and has not concluded that it can resolve any issues that may arise in complying with Year 2000 without disruption of its business or without incurring significant expense. In addition, even if the Company's internal systems are not materially affected by Year 2000 compliance issues, the Company could be affected through disruption in the operation of the enterprises with which the Company interacts. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations primarily through private sales of convertible preferred stock totaling $19.7 million and, to a lesser extent, equipment lease financing and proceeds received from the exercise of employee stock options. As of March 29, 1998, the Company had $8.6 million in cash and cash equivalents and no outstanding bank indebtedness. The Company has historically held its cash balances in cash equivalents such as money market funds or as cash. The Company places its money market funds with high credit quality financial institutions and limits the amount of exposure with any one financial institution. Net cash used in operating activities was $6.1 million in 1995, $300,000 in 1996 and $1.2 million in 1997. The decrease from 1995 to 1996 was a result of a smaller operating loss and higher deferred contract funding in 1996, and the increase from 1996 to 1997 was a result of substantial increases in accounts receivable in 1997, partially offset by an increase in accounts payable. Net cash provided by operating activities was $4.4 million in the first quarter of 1998, consisting of net income for the quarter and changes in working capital. The Company's accounts receivable are highly concentrated and three customers accounted for all accounts receivable in 1997 and the first quarter of 1998. Although the Company has not experienced any bad debt write-offs to date, there can be no assurance that the Company will not be required to write off bad debt in the future, which would have a material adverse effect on the Company's business, financial condition and results of operations. To date, the Company's investing activities have consisted primarily of purchases of property and equipment. As of March 29, 1998, the Company did not have any material commitments other than commitments under operating and capital leases. See Note 4 of Notes to Financial Statements. The Company's capital expenditures, including capital leases, increased from $1.4 million in 1995 to $5.8 million in 1997, due to additional capital leases and purchases of computer equipment, including workstations and servers to support the Company's increased research and development activities. The Company invested $2.8 million in capital 32 expenditures in the first quarter of 1998, including capital leases primarily on computer equipment and software, including workstations and servers, in support of the Company's increased research and development activities. The Company expects its capital expenditures to increase as the Company further expands its research and development initiatives and as its employee base grows. The timing and amount of future capital expenditures will depend primarily on the Company's future growth. The Company expects to spend approximately $10 million for capital expenditures in 1998, primarily for capital leases and the purchase of computer and engineering workstations. The Company believes that the net proceeds from this offering, together with its existing cash balances, anticipated cash flows from operations and capital lease financing, will be sufficient to meet the Company's operating and capital requirements for at least the next 12 months, although the Company could be required, or could elect, to raise additional funds during such period. The Company's future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of expansion of research and product development efforts and the success of these development efforts, the costs and timing of expansion of sales and marketing activities, the extent to which the Company's existing and new products gain market acceptance, competing technological and market developments, the costs involved in maintaining and enforcing patent claims and other intellectual property rights, available borrowings under line of credit arrangements and other factors. The Company expects that it may need to raise additional equity or debt financing in the future. There can be no assurance that such additional financing will be available at all, or that such financing, if available will be obtainable on terms favorable to the Company and will not be dilutive to the Company's then-current stockholders. 33 BUSINESS OVERVIEW NVIDIA designs, develops and markets 3D graphics processors and related software that provide high performance interactive 3D graphics to the mainstream PC market. The Company's graphics processors incorporate a "fast- and-wide" 100 megahertz, 128-bit graphics architecture that is designed to deliver a highly immersive, interactive 3D experience with realistic imagery and stunning effects. The Company's RIVA128 and RIVA128ZX graphics processors provide superior processing power at competitive prices and are architected to take advantage of mainstream industry standards such as Microsoft's Direct3D. The highly integrated design of the RIVA128 and RIVA128ZX graphics processors combines high performance 3D and 2D graphics on a single chip and provides a simpler and lower cost graphics solution relative to competing solutions, including multi-chip or multi-board 2D/3D graphics subsystems. NVIDIA designed the RIVA128 graphics processor to enable PC OEMs and add-in board manufacturers to build award-winning products by delivering state-of- the-art interactive 3D graphics capability to end users while maintaining affordable prices. The Company believes that by developing 3D graphics solutions that provide superior performance and address the key requirements of the mainstream PC market, it will accelerate the adoption of 3D graphics throughout this market. The benefits and performance of the RIVA128 graphics processor have received significant industry validation and have enabled the Company's customers to win over 80 industry awards. NVIDIA's products currently are designed into products offered by five of the top ten PC OEMs in the United States--Compaq, Dell, Gateway 2000, Micron and Packard Bell NEC-- and by leading add-in board manufacturers such as Diamond and STB. INDUSTRY BACKGROUND Interactive 3D graphics technology is emerging as one of the most significant new computing developments since the introduction of the graphical user interface. The visually engaging and interactive nature of 3D graphics responds to consumers' demands for a convincing simulation of reality beyond what is possible with traditional 2D graphics. The fundamental interactive capability of 3D graphics is expected to make it a natural and compelling medium for existing and emerging applications for entertainment, Internet, business and education. Interactive 3D graphics is required across various computing and entertainment platforms, such as workstations, specialized arcade systems and home gaming consoles. However, the mainstream PC market has only recently begun to transition from traditional 2D graphics to high quality, interactive 3D graphics. Continuing advancements in semiconductor manufacturing have made available more powerful and affordable microprocessors and 3D graphics processors, both of which are essential to deliver interactive 3D graphics to the mainstream PC market. Additionally, the industry has broadly adopted Microsoft's 3D API, Direct3D, which serves as a common and standard language between software applications and 3D graphics processors. This has spurred the development of numerous compelling 3D titles, and subsequently strong consumer demand. The Company believes that a PC's interactive 3D graphics capability represents one of the primary means by which users differentiate among various systems. PC users today can easily differentiate the quality of graphics and prefer personal computers that provide a superior visual experience. These factors have dramatically increased demand for 3D graphics processors. Mercury Research estimates that 3D graphics will be standard in every PC unit shipped by 2001. Mercury Research also estimates 8.6 million 3D graphics processors were sold in 1997 and 180 million will be sold in 2001. The technology required to create interactive and visually engaging 3D graphics is algorithmically complex and computationally intensive. To deliver high quality interactive 3D graphics, advanced 3D graphics processors require millions of transistors to process billions of arithmetic operations per second. Current 3D graphics processors are over ten times more complex than 2D accelerators and comparable to the complexity of the 34 Pentium microprocessor. Yet despite recent advances, PC 3D graphics available today cannot deliver in real time the quality of graphics seen in the film "Toy Story." Such 3D graphics required over 100 powerful workstations and over 800,000 computer hours to render the film's 114,000 frames, with each frame requiring an average of seven hours to render. For mainstream PCs to provide this level of 3D graphics capability, the performance of 3D graphics processors will need to be improved by several more orders of magnitude. To approach "real world" graphics performance even beyond that seen in "Toy Story," graphics processors would require significant further improvement in performance. The demanding requirements of high performance 3D graphics present significant new challenges for semiconductor graphics companies in the mainstream PC market. Certain suppliers offer 3D graphics solutions that only address specific niches of the market, such as the gaming or CAD/CAM markets. These solutions typically have been relatively expensive, in some cases involving multiple chips on an add-in card, with separate chips for 2D graphics and 3D graphics processing. Furthermore, these niche 3D solutions often require content providers to develop to proprietary APIs other than Microsoft's Direct3D in order to achieve the necessary performance. The higher product costs and API limitations have made it difficult for such targeted 3D graphics solutions to achieve widespread acceptance in the mainstream PC market. On the other end of the spectrum, traditional 2D graphics suppliers have attempted to leverage their installed base by adding 3D graphics functionality to their 2D graphics architectures. However, 3D graphics algorithms and architectures are significantly more complex than those of 2D graphics, and the traditional 2D graphics suppliers face many challenges to develop and provide cost-effective high performance 3D graphics. The Company believes that a substantial market opportunity exists for providers of high performance 3D graphics products for the mainstream PC market, particularly as high performance 3D graphics have become an increasingly important requirement and point of differentiation for PC OEMs. Consumer PC users demand a compelling visual experience and compatibility with existing and next-generation 3D graphics applications at an affordable price. Application developers require high performance, standards-based 3D architectures with broad market penetration. Since graphics is a key point of differentiation, PC OEMs continually seek to incorporate leading-edge cost- effective 3D graphics solutions to build award-winning products. The Company believes that providers of interactive 3D graphics solutions will compete based on their ability to leverage their technology expertise to simultaneously meet the needs of end users, application developers and OEMs. THE NVIDIA SOLUTION NVIDIA has developed a family of 3D graphics processors and related software that provides high performance interactive 3D graphics to the mainstream PC market. The Company's products allow users to enjoy a highly immersive, interactive 3D experience with compelling visual quality, realistic motion and complex object and scene interaction at real-time frame rates. By providing this level of performance at an affordable price to OEMs and end users, the Company believes that it will accelerate the adoption of interactive 3D graphics throughout the mainstream PC market. The Company's products are used by leading PC OEMs, such as Compaq, Dell, Gateway 2000, Micron and Packard Bell NEC, and leading add-in board manufacturers, such as Diamond and STB. The RIVA128 graphics processor has received significant industry validation and has enabled the Company's customers to receive over 80 industry awards. The key features and benefits of the Company's solution are as follows: High Performance. The RIVA128 and RIVA128ZX graphics processors' 128-bit architecture combined with a proprietary texture cache can process 1.5 million polygons per second and maintain a fill rate of 100 million texture mapped pixels per second. This performance is driven by the processing power of a 5 GFLOPS (billions of floating point operations per second) floating point polygon setup engine and a 15 BOPS (billions of operations per second) integer pixel processing engine. The RIVA128 and RIVA128ZX graphics processors also include an extensive set of reference drivers that translate between the software API and hardware. The software driver is designed to maximize performance of the graphics processor and to maintain compatibility with each successive generation of the Company's products. The software drivers have the flexibility to be continually 35 enhanced in order to further improve the performance of the processors. The Company believes that the high performance of its graphics processors provides a competitive advantage to the Company's OEM customers, enabling them to differentiate their systems from those of other PC vendors. Standards-Based. The RIVA128 and RIVA128ZX products are architected to take full advantage of industry standards such as Microsoft's Direct3D. The standards-compliant design of the Company's graphics processors provides OEMs maximum flexibility in the design and use of the systems. In particular, the Company believes that its focus on the Microsoft Direct3D API positions it well in the mainstream PC market as this standard proliferates and supports more advanced 3D visuals. Microsoft's Direct3D API has gained broad developer support, with numerous 3D titles currently using this API. Integrated Design. The RIVA128 and RIVA128ZX graphics processors' highly integrated single-chip design supports high performance interactive 3D graphics applications while simultaneously optimizing 2D graphics and providing VGA compatibility and DVD playback. By integrating 2D graphics and 3D graphics on one chip, the Company believes that it has standardized the platform for developers and provided a graphics solution that is simpler and lower cost relative to competing solutions, including multi-chip or multi- board 2D/3D graphics subsystems. 128-bit Architecture. The Company's 128-bit product architecture and leading technology enable it to provide products with state-of-the-art interactive 3D graphics performance and superior processing power. With a "fast-and-wide" 100 megahertz, 128-bit graphics architecture, the RIVA128 and RIVA128ZX graphics processors deliver 3D graphics with great detail, smooth shading, high frame rates and overall stunning effects, while maintaining volume pricing for multimedia and entertainment applications. STRATEGY The Company's objective is to be the leading supplier of high performance 3D graphics processors for PCs. The Company's strategy to achieve this objective includes the following key elements: Focus on the Mainstream PC Market. The Company's strategy is to achieve market leadership in the high volume mainstream PC market by providing award- winning performance at competitive prices. By developing 3D graphics solutions that provide superior performance and address the key requirements of the mainstream PC market, NVIDIA believes that it will accelerate the adoption of 3D graphics throughout the mainstream PC market. As part of its strategy to address the broadest segment of the PC market, the Company has closely aligned its product development with Microsoft's Direct3D API, rather than creating and promoting a proprietary API. The Company believes this alignment with Direct3D maximizes third-party software support. Target Leading OEMs. The Company's strategy is to enable its leading OEM customers to differentiate their products in a highly competitive marketplace by using NVIDIA's high performance 3D graphics processors. NVIDIA believes that design wins with these industry leaders provide market validation of its products, increase brand awareness and enhance the Company's ability to penetrate additional leading customer accounts. In addition, the Company believes that close relationships with OEMs will allow the Company to better anticipate and address customer needs with its future generation of products. NVIDIA's products currently are designed into products offered by five of the top ten PC OEMs in the United States--Compaq, Dell, Gateway 2000, Micron and Packard Bell NEC--and by leading add-in board manufacturers such as Diamond and STB. Extend Technological Leadership in 3D Graphics. NVIDIA believes that its products provide superior interactive 3D graphics to the mainstream PC market. The Company is focused on leveraging its advanced engineering capabilities to accelerate the quality and performance of 3D graphics in PCs. A fundamental aspect of NVIDIA's strategy is to actively recruit the best 3D graphics engineers in the industry, and NVIDIA believes that it has assembled an exceptionally experienced and talented engineering team. The Company intends to leverage this advantage to achieve new levels of graphics features and performance, enabling customers to achieve award-winning performance in their products. 36 Increase Market Share by Leveraging Strategic Alliances. The Company believes that substantial market share will be important to achieving success in the 3D graphics business. The Company intends to achieve a leading share of the market by devoting substantial resources towards establishing NVIDIA's brand and leading product capabilities as the de facto graphics standard for end users, application developers and OEMs. The Company has leveraged the RIVA128 graphics processor architecture to achieve broader market penetration by forming a strategic alliance with ST that gives ST the right to manufacture products for sale. NVIDIA ARCHITECTURE, PRODUCTS AND PRODUCTS UNDER DEVELOPMENT 3D PROCESSING TECHNOLOGY BACKGROUND 3D graphics processors create two-dimensional images, which can be displayed on computer monitors or other output devices, from computer specifications of three-dimensional objects or "models." These two-dimensional images are typically the perspective view of the objects from an eye-point that changes with time, and as such are computationally very intensive. The 3D effect arises from a variety of visual cues, such as perspective, occlusion, surface shading, shadows, focus and motion. Convincing realism arises from precise calculation of these and other effects, and these calculations require dedicated processors, which provide far more power and bandwidth than microprocessors can deliver. The 3D graphics process is a series of specialized steps, often referred to as the 3D graphics pipeline. Typically, the microprocessor chooses an eye- point and decides which objects should be displayed. These are commonly communicated to the graphics subsystem via a software interface, such as Microsoft's Direct3D or SGI's OpenGL. The processing itself occurs in several steps, as depicted and described below: GEOMETRY POLYGON MODEL -- PROCESSING -- SETUP -- RASTERIZATION -- DISPLAY Model. The model typically is expressed as a set of polygons, such as triangles, that form the basic shape of a three-dimensional object and have attributes such as position and color at each vertex. Geometry processing. Geometry processing transforms the original position and orientation of the polygons to their new position on the screen. Based on their position and orientation, some aspects of their surface color and lighting can be computed. The 3D visual cues of perspective and motion are handled during this stage. These calculations require very high floating-point computation power and are performed by the host microprocessor. Polygon setup. Polygon setup calculates the slopes of the polygon sides and various other derivatives that greatly accelerate the rasterization process. Although early graphics devices performed these calculations in the host microprocessor, today's 3D graphics processor perform these calculations, permitting significantly higher performance. Rasterization. Rasterization computes the color and other information for every pixel (dot on the screen) that a transformed polygon touches. A number of complex algorithms compute the color uniquely for each pixel, as well as perform the remaining visual cues, such as shading, shadows, focus and occlusion. This is the most computationally intensive step of the graphics pipeline and the processors are required to perform up to 1,000 calculations per pixel, with this number increasing rapidly. Display. Display consists of sequentially reading out the color of each pixel at a rate matched to the monitor. Unlike the other stages in the 3D graphics pipeline, which are purely digital, the signals to the monitor are analog, and the frequencies are far higher. 37 The complexity of the different steps in the 3D graphics pipeline requires billions of floating-point and integer operations in real time to deliver a realistic and interactive experience. Image quality determines whether 3D computer representation looks realistic, and 3D performance determines whether a 3D system conveys a sense of fluid motion in real time. If the performance is below a certain threshold, a 3D system can in fact reduce the productivity or the enjoyment of the user, even if the image quality is high. The challenge with high quality 3D is to deliver the processing power required to perform these computations without creating bottlenecks in the 3D graphics pipeline. NVIDIA PROCESSOR ARCHITECTURE The RIVA128 and RIVA128ZX graphics processors are highly integrated and deliver high frame rate 3D graphics, as well as 2D graphics, VGA and video processing in a single processor. The primary functional units of the RIVA128 and RIVA128ZX graphics processors are the 3D geometry processing unit, the 2D engine, the 3D pixel processor, the texture cache and the Palette-DAC and video processor. The following illustrates the primary components of the RIVA128 graphics processor: [GRAPHIC APPEARS HERE] [Description of illustration: Depiction of RIVA128 3D graphics processor, with the following functional areas labelled: 3D Geometry Processing Unit, Texture Cache, Video Port, 2D Engine, 3D Pixel Processor, Palette-DAC and Video Processor, VGA, Internal Bus, Memory Controller, PCI/AGP Interface.] The RIVA128 3D Graphics Processor 3D Geometry Processing Unit. This engine performs the polygon setup and lighting calculations and prepares data for pixel processing. This 5 GFLOPs floating point engine processes up to five million triangles per second. 2D Engine. The 2D rendering engine provides high performance for 2D applications. The 2D engine is necessary for applications such as those used in a business environment where 2D objects are drawn to and moved around on the computer monitor. Examples include Windows-based 38 applications such as Microsoft Word, Powerpoint or Excel. The presence of high performance 2D graphics is a critical function for 3D graphics processors targeted for the mainstream PC market. 3D Pixel Processor. The 3D pixel processor calculates pixel colors and other attributes to be rendered to the computer screen. It includes advanced rendering capabilities, such as 32-bit RGB Gouraud shading, alpha blending, perspective correct per pixel fog and perspective correct specular highlights. Texture Cache. The texture cache provides high performance, local texture storage for the pixel processing engine. Palette-DAC and Video Processor. The Palette-DAC pipeline accelerates full-motion video playback, sustaining 30 frames per second while retaining high quality color resolution, implementing true bilinear filtering for scaled video, and compensating for filtering losses using edge enhancement algorithms. NVIDIA PRODUCTS RIVA128 Graphics Processor The RIVA128 graphics processor enables PC OEMs and add-in board manufacturers to satisfy end-user performance requirements by providing visual realism and real-time interactivity. The RIVA128 graphics processor incorporates 3.5 million transistors and operates on 100 MHz clock speed, enabling it to perform 20 billion operations per second. The RIVA128 graphics processor breaks through bottlenecks created by the computationally intensive requirements of 3D graphics by providing superior processing power. The highly integrated RIVA128 graphics processor delivers high frame rate 3D graphics, as well as 2D graphics, VGA and video processing in a single processor. The RIVA128 graphics processor also includes a rich set of reference drivers and tools that translate between software API and hardware. These drivers also provide the ability to connect to and process data from external video devices. The software driver is designed to maximize performance of the graphics processor and to maintain compatibility with each successive generation of the Company's products. The software drivers have the flexibility to be continually enhanced in order to further improve the performance of the processors. The RIVA128 graphics processor has received significant industry validation and has enabled the Company's customers to receive over 80 industry awards. Key features of the RIVA128 graphics processor include the following: Standard API Compatibility. The RIVA128 graphics processor supports applications written for the two most widely accepted industry standard graphics APIs, Microsoft's Direct3D and SGI's OpenGL. 5 GFLOPs Polygon Setup Engine. Polygon setup minimizes the number of format conversions and other calculations performed by the host microprocessor. The polygon setup engine can operate at a sustained rate of 1.5 million triangles per second or a peak rate of five million triangles per second. Full 3D Feature Set. The full 3D feature set includes perspective correct texturing, bi-linear filtering, Z-buffer, LOD MIP-mapping, lighting and alpha blending. 128-bit Graphics Engine and Memory Interface. The "fast and wide" 128-bit memory interface provides 1.6 gigabytes per second bandwidth to local frame buffer memory, which results in industry-leading performance and graphics realism. 230 MHz Integrated RAMDAC. The 230 MHz integrated RAMDAC allows for high resolution, high refresh rate output to computer monitors. NTSC/PAL TV Output. NTSC/PAL television output allows connections to television monitors. Media Port. The media port allows direct input from television signals and MPEG2/DVD devices. 39 The RIVA128 graphics processor is produced using a .35 micron manufacturing process. The Company introduced the RIVA128 graphics processor in April 1997 and began shipping in volume in August 1997. RIVA128ZX Graphics Processor The RIVA128ZX graphics processor extends the functionality and performance of the RIVA128 graphics processor and includes two additional design features, AGP 2X and an 8MB (megabyte) frame buffer. The AGP 2X, Intel's newest graphics bus, doubles the available bandwidth between the microprocessor and the graphics engine. With AGP 2X support, the RIVA128ZX graphics processor is designed to process more complex 3D computer representations more efficiently. Doubling the size of the frame buffer to 8MB provides the RIVA128ZX graphics processor with the ability to support higher resolution displays with more colors, resulting in a richer real-time experience. The RIVA128ZX graphics processor is produced using a .35 micron manufacturing process, began shipping in March 1998 and is scheduled for volume shipment in the second quarter of 1998. NVIDIA PRODUCTS UNDER DEVELOPMENT RIVA TNT The Company announced its second-generation product, the RIVA TNT, in March 1998. The RIVA TNT is currently under development. The Company believes the RIVA TNT will supplant the RIVA128ZX graphics processor as NVIDIA's "performance offering" during the second half of 1998. The RIVA TNT will be designed to include a 16MB frame buffer, two pixels per clock to enable faster and higher quality rendering, AGP 2X support, greater than 200 million pixel per second fill rate and 8 million triangle peak set up. SALES AND MARKETING NVIDIA's sales strategy is a key part of its objective to become the leading supplier of high performance 3D graphics processors for PCs. In order to meet customer and end-user requirements and achieve design wins, the Company's sales team works closely with PC OEMs, add-in board manufacturers and industry trend setters to define product features, performance, price and timing of new products. Members of the Company's sales team have a high level of technical expertise and product and industry knowledge to support a competitive and complex design win process. NVIDIA also employs a highly skilled team of application engineers to assist PC OEMs and add-in board manufacturers in designing, testing and qualifying system designs that incorporate NVIDIA products. The Company believes that the depth and quality of this design support are key to improving PC OEMs' and add-in board manufacturers' time-to- market, maintaining a high level of customer satisfaction among PC OEMs and add-in board manufacturers and fostering relationships that encourage its customers to use the next-generation of NVIDIA's products. In the 3D graphics market, the sales process involves influencing leading PC OEMs' and add-in board manufacturers' graphics processor purchasing decisions, achieving key design wins and supporting the product design into high volume production. These design wins in turn influence the retail and system integrator channel that is serviced by add-in board manufacturers. The Company's distribution strategy is to work with a relatively small number of leading add-in board manufacturers that have relationships with a broad range of major PC OEMs and/or strong brand name recognition in the retail channel. Currently, the Company sells the RIVA128 graphics processor directly to add-in board manufacturers, Diamond and STB, which in turn sell boards with the RIVA128 graphics processor to leading OEMs, such as Compaq, Dell, Gateway 2000, Micron and Packard Bell NEC, to retail outlets, such as BestBuy and CompUSA, and to a large number of system integrators. Sales to STB and Diamond accounted for 63% and 31%, respectively, of the Company's total revenue in 1997, and 49% and 39%, respectively, of the Company's total revenue in the first quarter of 1998. 40 The Company also has a strategic collaboration agreement with ST (the "ST Agreement"), pursuant to which ST manufactures the RIVA128 graphics processor, sells it to the Company and distributes the RIVA128 graphics processor on the Company's behalf. ST is entitled under the ST Agreement to sell the RIVA128 and RIVA128ZX graphics processors in consideration for a royalty payment to the Company. ST also is entitled under this agreement to manufacture the RIVA128ZX graphics processor. Under the ST Agreement, ST also has a worldwide license to incorporate the technology underlying the RIVA128 and RIVA128ZX graphics processors (including the source code and architecture) (the "RIVA Technology") in its own products, subject to certain limitations on the modification of such technology, and a right to receive software engineering and quality assurance support from the Company for the RIVA Technology through December 31, 1998. The Company believes that its relationship with ST allows it to realize broad market penetration, increase sales leverage and achieve greater brand awareness. Royalty revenue received from ST pursuant to the ST Agreement represented 6% and 12% of the Company's total revenue in 1997 and the first quarter of 1998, respectively. The Company expects royalty revenue from ST to decrease in the second quarter of 1998 and subsequent quarters. The NVIDIA sales effort is accompanied by a variety of product and corporate marketing activities, including technical support and product launches. As part of the product launch effort, the Company demonstrates new products to highlight their capabilities. NVIDIA believes these demonstrations help position its products favorably relative to products of its competitors. The Company also maintains close relationships with key industry analysts and trade press, conducts frequent press tours and participates, with its add-in board manufacturers and OEM customers, in benchmark tests executed by key trade publications. In addition, the Company sponsors and participates in industry tradeshows, marketing communications and market development activities designed to generate awareness of the Company and its products. The Company intends to continue to devote significant resources toward establishing brand recognition, including advertising in key newspapers and trade magazines and participation in graphics newsgroups and web sites. The Company also uses its corporate web site to promote the Company and its products. To encourage software title developers and publishers to develop games optimized for platforms utilizing the Company's products, the Company seeks to establish and maintain strong relationships in the software development community. Engineering and marketing personnel interact with and visit key software developers to promote and discuss the Company's products, seeking product requirements and solving technical problems. The Company's developer program makes products available to partners prior to volume availability to encourage the development of software titles that are optimized for the Company's products. MANUFACTURING The Company has a "fabless" manufacturing strategy whereby the Company employs world class suppliers for all phases of the manufacturing process, including fabrication, assembly and testing. This strategy leverages the expertise of industry-leading, ISO-certified suppliers in such areas as fabrication, assembly, quality control and assurance, reliability and testing, and allows the Company to avoid the significant costs and risks associated with owning and operating such manufacturing operations. These suppliers also are responsible for procurement of raw materials used in the production of the Company's products. As a result, the Company can focus its resources on product design, quality assurance, marketing and customer support. The RIVA128 graphics processor is fabricated for the Company by ST, which is one of the ten largest semiconductor manufacturers in the world. ST currently produces the semiconductor die for the Company using a .35 micron Complementary Metal-Oxide Semiconductor (CMOS) process technology. ST then assembles and packages the semiconductor die, tests the finished product, and ships the finished product to the Company. ST has fabrication operations located in Crolles, France and assembly and testing operations located in Malta. The Company has recently begun using TSMC to manufacture the RIVA128ZX graphics processor, although it has not yet received volume quantities of any products from TSMC. The Company recently qualified Anam for assembly and testing and intends to have volume testing performed by Anam in the future. The Company currently is seeking an additional source of supply for both assembly and test. 41 The fabrication of semiconductors is a complex process. Contaminants, defects in masks used to print circuits on wafers, difficulties in the fabrication process and other factors can cause a substantial percentage of wafers to be rejected or a significant number of die on each wafer to be nonfunctional. These problems are difficult to diagnose and time-consuming and expensive to remedy. As a result, semiconductor companies frequently encounter difficulties in achieving acceptable product yields. When production of a new product begins, as with the RIVA128ZX graphics processor, the Company typically pays for wafers, which may or may not have any functional products. Accordingly, the Company bears the financial risk until production is stabilized. Once production is stabilized, the Company pays for functional die only. Because TSMC has only recently begun to manufacture products for the Company, until the production yields of its product at TSMC stabilize, the Company must pay an agreed price for wafers regardless of yield. Failure to stabilize yields or failure to achieve acceptable yields from any current or future third-party manufacturer would materially adversely affect the Company's business, financial condition and results of operations. For example, in December 1997, the Company experienced low manufacturing yields at ST. The Company receives semiconductor products from its subcontractors, performs incoming quality assurance and ships them to its add-in board manufacturer customers, such as Diamond and STB, from its location in Sunnyvale. The add-in board manufacturers then produce boards, combine NVIDIA software with their own software and ship the product to the retail market as add-in boards or to OEMs, such as Compaq, Dell Gateway 2000, Micron and Packard Bell NEC, for inclusion in the OEMs' products. In the event of production difficulties, shortages or delays experienced by any one of its suppliers, the Company's business, financial condition or results of operation may be adversely impacted. Furthermore, although quality assurance measures have been taken, there can be no guarantee against defects affecting the quality, performance or reliability of the Company's products. Any such defects could require costly product recalls or cessation of shipments, adversely affecting the Company's business, financial condition and results of operations, and resulting in a decline of revenues, increased costs (associated with return, repair, replacement and shrinkage associated with such defects), cancellations or rescheduling of customer orders and shipments. See "Risk Factors--Dependence on Third-Party Manufacturers; Absence of Manufacturing Capacity; Manufacturing Risks," "--Dependence on ST Microelectronics," "--Manufacturing Yields," "--Transition to New Manufacturing Process Technologies," "--Dependence on Third-Party Subcontractors for Assembly and Testing" and "--Risks of Product Defects and Incompatibilities; Product Liability." RESEARCH AND DEVELOPMENT The Company believes that the continued introduction of new and enhanced products designed to deliver leading 3D graphics performance will be essential to its future success. NVIDIA's research and development strategy is to focus on concurrently developing multiple generations of devices using independent design teams. The Company's research and development team has enabled NVIDIA to deliver award-winning products to its OEM customers. The RIVA128 graphics processor has enabled its customers to win over 80 awards from recognized industry publications, including PC Magazine, PC Computing, PC World, Computer Gaming World, PC Games and CNET. NVIDIA's research and development efforts are performed within specialized groups consisting of software engineering, hardware engineering, VLSI design engineering, process engineering, and architecture and algorithms. These groups act as a pipeline designed to allow the efficient simultaneous development of new products. The software engineering group is responsible for the development of drivers for the various software APIs. The hardware engineering group designs and develops new product hardware. The VLSI design engineering group maps the Company's design ideas to specific silicon structures, and the process engineering group determines how these devices will be fabricated and communicates with the Company's manufacturers. The architecture and algorithms group is responsible for maintaining and further developing what the Company believes is an extensible product architecture, allowing the Company to continually add features to its products without sacrificing compatibility or incurring significant redesign costs. 42 A critical component of the Company's product development effort is its partnerships with leaders in the CAD industry. The Company has invested significant resources to develop relationships with industry leaders, including Avant! Corporation, Cadence Design Systems, Inc. and Synopsys, Inc. The Company believes that by forming these relationships, and utilizing next- generation development tools to design, simulate and verify its products, NVIDIA will be able to remain at the forefront of the 3D graphics market and to continue to develop products on a rapid basis that utilize leading-edge technology. The Company has substantially increased its engineering and technical resources and has 77 full-time employees engaged in research and development. Expenditures for research and development before adjustments for contract funding were $2.4 million, $1.2 million and $6.6 million in 1995, 1996 and 1997, respectively. COMPETITION The market for 3D graphics processors for mainstream PCs in which the Company competes is intensely competitive and is characterized by rapid technological change, evolving industry standards and declining average selling prices. NVIDIA believes that the principal factors of competition in this market are performance, conformity to industry-standard APIs, software support, access to customers and distribution channels, manufacturing capabilities, price of graphics processors and total system costs of add-in boards. The Company expects competition to increase both from existing competitors and new market entrants with products that may be less costly than the Company's 3D graphics processors or may provide better performance or additional features not provided by the Company's products. There can be no assurance that the Company will be able to compete successfully in the emerging mainstream PC graphics market. NVIDIA's primary source of competition is from companies that provide or intend to provide 3D graphics solutions for the mainstream PC market. These include (i) new entrants in the 3D graphics processor market with existing presence in the PC market, such as Intel, (ii) suppliers of graphics add-in boards that utilize their internally developed graphics chips, such as ATI and Matrox, (iii) suppliers of 2D graphics chips that are introducing 3D functionality as part of their existing solutions, such as S3 and Trident, (iv) companies that have traditionally focused on the professional market and provide high end 3D solutions for PCs and workstations, including 3Dlabs, Real3D and SGI, and (v) companies with strength in the interactive entertainment market, such as Chromatic, 3Dfx and Rendition. In March 1998, Intel began shipping the i740, a 3D graphics accelerator that is targeted at the mainstream PC market. Intel has significantly greater resources than the Company, and there can be no assurance that the Company's products will compete effectively against the i740 or any future products introduced by Intel, that the Company will be able to compete effectively against Intel or that Intel will not introduce additional products that are competitive with the Company's products in either performance or price or both. NVIDIA expects Intel to continue to invest heavily in research and development and new manufacturing facilities, to maintain its position as the largest manufacturer of PC microprocessors and one of the largest manufacturers of motherboards, to increasingly dominate the PC platform and to promote its product offerings through advertising campaigns designed to engender brand loyalty among PC users. Intel may in the future develop graphics add-in cards or graphics-enabled motherboards using its i740 3D graphics accelerators or other graphics accelerators, which could directly compete with graphics add-in cards or graphics-enabled motherboards that the Company's customers may develop. In addition, due to the widespread industry acceptance of Intel's microprocessor architecture and interface architecture, including its AGP, Intel exercises significant influence over the PC industry generally, and any significant modifications by Intel to the AGP, the microprocessor or other aspects of the PC microprocessor architecture could result in incompatibility with the Company's technology, which would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, any delay in the public release of information relating to such modifications could have a material adverse effect on the Company's business, financial condition or results of operations. In April 1998, SGI and Intel announced a strategic relationship, which includes a broad patent cross-license agreement. The Company believes that this agreement will provide SGI with access to Intel processors for the 43 development of SGI workstations. In addition, the Company believes that under the cross-license agreement Intel will have access to SGI graphics patents, which may allow Intel to compete more effectively with the Company. SGI also may compete directly with the Company as a result of this relationship with Intel. There can be no assurance that the Company will be able to compete successfully against SGI or Intel. SGI filed a patent infringement lawsuit against the Company in April 1998. See "--Legal Proceedings". In addition to Intel, the Company competes with suppliers of graphics add-in boards that utilize their internally developed graphics chips, such as ATI and Matrox. NVIDIA also competes with companies that typically have operated in the PC 2D graphics market and that now offer 3D graphics capability as an enhancement to their 2D graphics solutions, such as S3 and Trident. Many of these competitors have introduced 3D graphics functionality on new versions of existing graphics chips. In addition, the Company's competitors include companies that traditionally have focused on the production of high-end 3D graphics systems targeted at the professional market, such as 3Dlabs, Intergraph, Real3D and SGI. While these companies produce high performance 3D graphics systems, they historically have done so at a significantly higher price point than the Company and have focused on the professional and engineering market. Some of these companies are developing lower cost versions of their 3D graphics technology to bring workstation-like 3D graphics to mainstream PCs, and there can be no assurance that the Company will be able to compete successfully against them. For example, 3Dlabs markets the PERMEDIA 2, a graphics accelerator designed for the mainstream PC market. NVIDIA also competes with companies that have recently entered or are expected to enter the market with an integrated 3D/2D graphics solution, but which have not traditionally manufactured 2D graphics solutions, such as Chromatic, 3Dfx and Rendition. In addition to the Company's known competitors, the Company anticipates that there will be new entrants in the graphics processor market, and there can be no assurance that the Company will compete effectively against any such new competitors. Several of the Company's current and potential competitors have substantially greater financial, technical, manufacturing, marketing, distribution and other resources, greater name recognition and market presence, broader product lines for the PC market, longer operating histories, lower cost structures and larger customer bases than the Company. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. Regardless of the relative qualities of the Company's products, the market power, product breadth and customer relationships of its larger competitors, particularly Intel, can be expected to provide such competitors with substantial competitive advantages. The Company does not seek to compete on the basis of price alone, but may be forced to lower prices to compete effectively. There can be no assurance that the Company will be able to compete successfully in the emerging mainstream PC 3D graphics market. PATENTS AND PROPRIETARY RIGHTS The Company relies primarily on a combination of patent, mask-work protection, trademarks, copyrights, trade secret laws, employee and third- party nondisclosure agreements and licensing arrangements to protect its intellectual property. The Company has 19 issued patents and 21 patent applications pending in the United States. Such issued patents have expiration dates from May 2015 to November 2016. The issued patents and pending patent applications relate to technology developed by the Company in connection with the development of its 3D graphics processors, including the RIVA128 graphics processor. The Company has no foreign patents or patent applications. The Company seeks to file for patents that have broad application in the semiconductor industry and that would provide a competitive advantage. However, there can be no assurance that the Company's pending patent application or any future applications will be approved, that any issued patents will provide the Company with competitive advantages or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the Company's ability to do business. In addition, there can be no assurance that others will not independently develop substantially equivalent intellectual property or otherwise gain access to the Company's trade secrets or intellectual property, or disclose such intellectual property or trade secrets, or that the Company can effectively protect its intellectual property. A failure by the Company to meaningfully protect its intellectual property could have a material adverse effect on the Company's business, financial condition or results of operations. 44 The Company attempts to protect its trade secrets and other proprietary information through confidentiality agreements with manufacturers and other partners, proprietary information agreements with employees and consultants and other security measures. The Company also relies on trademarks and trade secret laws to protect its intellectual property. Despite these efforts, there can be no assurance that others will not gain access to the Company's trade secrets, or that the Company can meaningfully protect its intellectual property. In addition, effective trade secret protection may be unavailable or limited in certain foreign countries. Although the Company intends to protect its rights vigorously, there can be no assurance that such measures will be successful. The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which has resulted in significant and often protracted and expensive litigation. The 3D graphics market in particular has been characterized recently by the aggressive pursuit of intellectual property positions, and the Company expects its competitors to continue to pursue aggressive intellectual property positions. In April 1998, SGI filed a patent infringement lawsuit against the Company, and in May 1998, S3 filed a patent infringement lawsuit against the Company. See "--Legal Proceedings." In addition, the Company from time to time has received notices alleging that the Company has infringed patents or other intellectual property rights owned by third parties. ST has certain patent licenses that in some cases may allow ST to manufacture the Company's products without infringing third-party patents. As the Company's products are manufactured by TSMC or other manufacturers, such licenses will no longer benefit the Company and therefore the risk of a third-party claim of patent infringement against the Company will increase. In the event infringement claims are made against the Company, the Company may seek licenses under such patents or other intellectual property rights. However, there can be no assurance that licenses will be offered or that the terms of any offered licenses will be acceptable to the Company. The failure to obtain a license from a third party for technology used by the Company could cause the Company to incur substantial liabilities and to suspend the manufacture of products. Furthermore, the Company may initiate claims or litigation against third parties for infringement of the Company's proprietary rights or to establish the validity of the Company's proprietary rights. The Company has agreed to indemnify certain customers for claims of infringement arising out of sale of the Company's product. Litigation by or against the Company or such customers concerning infringement would likely, and the SGI and S3 litigation will, result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation results in a favorable determination for the Company. In the event of an adverse result in the SGI, S3 or other litigation, the Company could be required to pay substantial damages, (which could include treble damages) cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology, discontinue the use of certain processes or obtain licenses for the infringing technology. There can be no assurance that the Company would be successful in such development or that such licenses would be available on reasonable terms, or at all, and any such development or license could require expenditures by the Company of substantial time and other resources. Although patent disputes in the semiconductor industry have often been settled through cross-licensing arrangements, there can be no assurance that, in the event that SGI, S3 or any other third party makes a successful claim against the Company or its customers, a cross-licensing arrangement could be reached. If such a license is not made available to the Company on commercially reasonable terms, the Company's business, financial condition or results of operations could be materially adversely affected. There can be no assurance that infringement claims by third parties or claims for indemnification by other customers or end users of the Company's products resulting from infringement claims will not be asserted in the future or that such possible assertions or the assertions currently raised in the SGI and S3 litigation, if proven to be true, will not materially adversely affect the Company's business, financial condition or results of operations. Any limitations on the Company's ability to market its products, or delays and costs associated with redesigning its products or payments of license fees to third parties, or any failure by the Company to develop or license a substitute technology on commercially reasonable terms, any of which may result from the SGI or S3 litigation, could have a material adverse effect on the Company's business, financial condition and results of operations. 45 EMPLOYEES As of March 29, 1998, the Company had 119 employees, 77 of whom were engaged in engineering and 42 of whom were engaged in sales, marketing, operations and administrative positions. No employee of the Company is covered by collective bargaining agreements, and the Company believes that its relationship with its employees is good. The Company's ability to operate successfully will depend in significant part upon the continued service of certain key technical and managerial personnel, and its continuing ability to attract and retain additional highly qualified technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company can retain such personnel or that it can attract or retain other highly qualified technical and managerial personnel in the future, including key sales and marketing personnel. The loss of key personnel or the inability to hire and retain qualified personnel could have a material adverse effect on the Company's business, financial condition or results of operations. See "Risk Factors-- Dependence on Key Personnel." FACILITIES The Company leases approximately 89,000 square feet in one building in Santa Clara, California, pursuant to a lease that expires in December 2002. The Company believes that its existing facilities are adequate to meet its needs for the foreseeable future. LEGAL PROCEEDINGS On April 9, 1998, the Company was notified that SGI had filed a patent infringement lawsuit against the Company in the United States District Court for the District of Delaware. The suit alleges that the sale and use of the Company's RIVA family of 3D graphics processors infringes a United States patent held by SGI. The suit seeks unspecified damages (including treble damages), an order permanently enjoining further alleged infringement and attorneys' fees. On May 11, 1998, the Company was notified that S3 had filed a patent infringement lawsuit against the Company in the United States District Court for the Northern District of California. The suit alleges that the sale and use of the Company's RIVA family of 3D graphics processors infringes three United States patents held by S3. The suit seeks unspecified damages (including treble damages), preliminary and permanent orders enjoining further alleged infringement and attorneys' fees. The Company has filed answers to each suit and has filed counterclaims asserting that the patents in each suit are neither infringed nor valid. Based on its investigation to date, the Company believes that it has meritorious defenses to the claims brought and intends to defend itself vigorously with respect to both lawsuits. S3 also has filed a motion for preliminary injunction to bar the Company's manufacture or sale of the RIVA128 products pending a final determination of the lawsuit. The Company believes that it has meritorious defenses to the preliminary injunction motion and intends to defend itself vigorously. The Company expects that the litigation with SGI and S3 will likely result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation results in a favorable determination for the Company. In the event of an adverse result in either suit, the Company could be required to do one or more of the following: pay substantial damages (including treble damages); preliminarily or permanently cease the manufacture, use and sale of any infringing products; expend significant resources to develop non-infringing technology; or obtain a license from SGI or S3 for any infringing technology. Either of these suits could result in limitations on the Company's ability to market its products, delays and costs associated with redesigning its products or payments of license fees or other payments to SGI or S3, any of which would have a material adverse effect on the Company's business, financial condition and results of operations. 46 MANAGEMENT EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS Certain information regarding the Company's executive officers, key employees and directors as of March 29, 1998 is set forth below.
NAME AGE POSITION - ---- --- -------- Jen-Hsun Huang.......... 35 President, Chief Executive Officer and Director Jeffrey D. Fisher....... 39 Vice President, Sales David B. Kirk........... 37 Chief Scientist Chris A. Malachowsky.... 38 Vice President, Engineering Lewis R. Paceley........ 42 Vice President, Corporate Marketing Curtis R. Priem......... 38 Chief Technical Officer Geoffrey G. Ribar....... 39 Chief Financial Officer Daniel F. Vivoli........ 37 Vice President, Product Marketing Richard J. Whitacre..... 42 Vice President, Operations and Corporate Engineering Tench Coxe (1).......... 40 Director Harvey C. Jones, Jr.(1). 45 Director William J. Miller....... 52 Director A. Brooke Seawell(2).... 50 Director Mark A. Stevens(2)...... 38 Director
- -------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. Jen-Hsun Huang co-founded the Company in April 1993 and has served as President, Chief Executive Officer and a member of the Board of Directors of the Company since its inception. From 1985 to 1993, Mr. Huang was employed at LSI Logic Corporation, a computer chip manufacturer, where he held a variety of positions, most recently as Director of Coreware business unit responsible for LSI's "system-on-a-chip" strategy. From 1983 to 1985, Mr. Huang was a microprocessor designer for Advanced Micro Devices, a semiconductor company. Mr. Huang holds a B.S.E.E. degree from Oregon State University and an M.S.E.E. degree from Stanford University. Jeffrey D. Fisher has been Vice President, Sales for the Company since July 1994. From September 1988 to July 1994, Mr. Fisher held various positions at Weitek Corporation, a semiconductor technology company, where his last position was as Director of World Wide Sales. Mr. Fisher holds a B.S.E.E. degree from Purdue University and an M.B.A. degree from Santa Clara University. David B. Kirk has been Chief Scientist for the Company since January 1997. From June 1996 to January 1997, Dr. Kirk was a software and technical management consultant. From 1993 to 1996, Dr. Kirk was Chief Scientist, Head of Technology for Crystal Dynamics, a video game manufacturing company. From 1989 to 1991, Dr. Kirk was an engineer for Apollo Systems Division of Hewlett- Packard Company. Dr. Kirk has authored seven patents relating to graphics design and has authored more than 50 articles on graphics technology. Dr. Kirk holds B.S. and M.S. degrees in Mechanical Engineering from the Massachusetts Institute of Technology and M.S. and Ph.D. degrees in Computer Science from the California Institute of Technology. Chris A. Malachowsky co-founded the Company in April 1993 and has been Vice President, Engineering for the Company since that time. From 1987 until April 1993, Mr. Malachowsky was a Senior Staff Engineer for Sun Microsystems, Inc., a supplier of enterprise network computing products. From 1980 to 1986, Mr. Malachowsky was a manufacturing design engineer at Hewlett-Packard Company. Mr. Malachowsky was a co-inventor of Sun Microsystems' GX graphics architecture and has authored 39 patents, most of which relate to graphics. Mr. Malachowsky holds a B.S.E.E. degree from the University of Florida and an M.S.C.S. degree from Santa Clara University. 47 Lewis R. Paceley has been Vice President, Corporate Marketing for the Company since December 1997. From January 1996 until September 1997, Mr. Paceley was Vice President, Marketing for Cyrix Corporation, a computer processor manufacturer. From 1982 until December 1995, Mr. Paceley held various positions at Intel, where his last position was as Marketing Director, Pentium Pro. Mr. Paceley holds a B.E. degree from Vanderbilt University and an M.S.E. degree from the University of Michigan. Curtis R. Priem co-founded the Company in April 1993 and has been Chief Technical Officer for the Company since that time. From 1986 to January 1993, Mr. Priem was Senior Staff Engineer at Sun Microsystems where he architected the GX graphics products, including the world's first single chip GUI accelerator. From 1984 to 1986, Mr. Priem was a hardware engineer at GenRad, Inc., a supplier of diagnostic equipment for electronic products. From 1982 to 1984, Mr. Priem was a staff engineer for Vermont Microsystems, Inc., a personal computer company, where he architected IBM's Professional Graphics Adapter, the PC industry's first graphics processor. Mr. Priem has authored 70 patents, all of which relate to graphics and I/O. Mr. Priem holds a B.S.E.E. degree from Rensselaer Polytechnic Institute. Geoffrey G. Ribar joined the Company as Chief Financial Officer in December 1997. From 1982 to December 1997, Mr. Ribar served in various positions at AMD, where his last position was Vice President and Corporate Controller. Mr. Ribar holds a B.S. degree in Chemistry and an M.B.A. degree from the University of Michigan. Daniel F. Vivoli has been Vice President, Product Marketing for the Company since December 1997. From October 1988 to December 1997, Mr. Vivoli held various positions at Silicon Graphics, Inc., a computing technology company, including Product Marketing Director, Director of Marketing--Advanced Graphics Division and --Interactive Systems Division, and finally Vice President of Marketing. From 1983 to 1988, Mr. Vivoli held various marketing positions at Hewlett-Packard Company. Mr. Vivoli holds a B.S.E.E. degree from the University of Illinois at Champaign-Urbana. Richard J. Whitacre has been Vice President, Operations and Corporate Engineering for the Company since July 1994. From 1990 to July 1994, Mr. Whitacre was Director of Engineering and then Vice President of Operations for SEEQ Technology Incorporated, a semiconductor company. From 1977 to 1990, Mr. Whitacre held various engineer and management positions at National Semiconductor Corporation, a semiconductor company. Mr. Whitacre holds a B.S.E.E. degree from the University of Illinois. Tench Coxe has been a director of the Company since June 1993. Mr. Coxe is a general partner of Sutter Hill Ventures, a venture capital investment firm. Prior to joining Sutter Hill Ventures in 1987, Mr. Coxe was Director of Marketing and MIS at Digital Communication Associates. Mr. Coxe holds a B.A. degree in Economics from Dartmouth College and an M.B.A. degree from the Harvard Business School. Mr. Coxe also serves on the Board of Directors of Avant! Corporation, Edify Corporation and SQL Financials International, Inc. Harvey C. Jones, Jr. has served as a director of the Company since November 1993. Since December 1987, Mr. Jones has held various positions at Synopsys, Inc., a developer of electronic design automation products, where he served as President through December 1992, as Chief Executive Officer until January 1994 and as Chairman of the Board until February 1998. Prior to joining Synopsys, Mr. Jones served as President and Chief Executive Officer of Daisy Systems Corporation, an electronic design automation company that Mr. Jones co-founded in 1981. Mr. Jones currently serves on the Board of Directors of Synopsys and Remedy Corporation, a client/server applications software company. Mr. Jones holds a B.S. degree in Mathematics and Computer Sciences from Georgetown University and an M.S. degree in Management from the Massachusetts Institute of Technology. William J. Miller has served as a director of the Company since November 1994. Mr. Miller has been Chief Executive Officer and Chairman of the Board of Avid Technology, Inc., a provider of digital tools for multimedia, since April 1996 and has served as President of Avid Technology since September 1996. From 48 March 1992 to October 1995, Mr. Miller served as Chief Executive Officer of Quantum Corporation, a developer of information storage products. He was a member of the Board of Directors, and Chairman thereof, from, respectively, May 1992 and September 1993 to August 1995. From 1981 to March 1992, he served in various positions at Control Data Corporation, a supplier of computer hardware, software and services, most recently as Executive Vice President and President, Information Services. Mr. Miller holds a B.A. and a J.D. degree from the University of Minnesota. Mr. Miller serves on the Board of Directors of Innovex, Inc. and Waters Corporation. A. Brooke Seawell has served as a director of the Company since December 1997. Since January 1997, Mr. Seawell has been Executive Vice President and Chief Financial Officer for NetDynamics, Inc., an Internet applications server company. From 1991 to January 1997, Mr. Seawell was Senior Vice President and Chief Financial Officer of Synopsys. Mr. Seawell holds a B.A. degree in Economics and an M.B.A. degree in Finance and Accounting from Stanford University. Mr. Seawell serves on the Board of Directors of several privately held companies. Mark A. Stevens has served as a director of the Company since June 1993. Mr. Stevens has been a general partner of Sequoia Capital, a venture capital investment firm, since March 1993. Prior to that time, beginning in July 1989, he was an associate at Sequoia Capital. Prior to joining Sequoia, he held technical sales and marketing positions at Intel. Mr. Stevens holds a B.S.E.E. degree, a B.A. degree in Economics and an M.S. degree in Computer Engineering from the University of Southern California and an M.B.A. degree from Harvard Business School. Mr. Stevens currently serves on the Board of Directors of Aspect Development, Inc., a client/server applications software company, and several privately held companies. The Company's Board of Directors (the "Board") is currently comprised of six directors. Directors are elected by the stockholders at each annual meeting of stockholders to serve until the next annual meeting of stockholders or until their successors are duly elected and qualified. The Company's Certificate of Incorporation, which will become effective upon the completion of this offering, provide that the Board will be divided into two classes, Class I and Class II, with each class serving staggered two-year terms. The Class I directors, initially Messrs. Coxe, Huang and Jones, will stand for reelection or election at the 1999 annual meeting of stockholders. The Class II directors, initially Messrs. Miller, Seawell and Stevens will stand for reelection or election at the 2000 annual meeting of stockholders. BOARD COMMITTEES The Board of Directors has an Audit Committee and a Compensation Committee. The Audit Committee, which currently consists of Messrs. Seawell and Stevens, reviews the internal accounting procedures of the Company and consults with and reviews the services provided by the Company's independent auditors. The Compensation Committee, which currently consists of Messrs. Coxe and Jones, reviews and recommends to the Board the compensation and benefits of the Company. The Compensation Committee also administers the issuance of stock options and other awards under the Company's 1998 Equity Incentive Plan, 1998 Employee Stock Purchase Plan and 1998 Non-Employee Directors' Stock Option Plan. See "--Employee Benefit Plans." DIRECTOR COMPENSATION Directors currently do not receive any cash compensation for their services as members of the Board of Directors, although they are reimbursed for certain expenses in connection with attendance at Board and Committee meetings. In July 1996, each of Messrs. Coxe and Stevens were granted an option to purchase 50,000 shares of the Company's Common Stock at an exercise price of $.36 per share. In November 1993 and August 1996, Mr. Jones was granted options to purchase 75,000 and 70,000 shares of the Company's Common Stock at exercise prices of $.05 and $.36 per share, respectively. In November 1994 and June 1996, Mr. Miller was granted options to purchase 75,000 and 50,000 shares of the Company's Common Stock at exercise prices of $.05 and $.36 per share, respectively. In December 1997, Mr. Seawell was granted an option to purchase 50,000 49 shares of the Company's Common Stock at an exercise price of $3.15 per share. Non-employee directors also are eligible to participate in the Company's 1998 Non-Employee Directors' Stock Option Plan (the "Director's Plan"). On March 30, 1998, each of Messrs. Coxe, Jones, Miller and Stevens was automatically granted an option to purchase 20,000 shares of the Company's Common Stock; Mr. Seawell was automatically granted an option to purchase 5,000 shares of the Company's Common Stock; each of Messrs. Coxe and Jones was automatically granted an option to purchase 2,500 shares of the Company's Common Stock; and each of Messrs. Miller, Seawell and Stevens was automatically granted an option to purchase 1,250 shares of the Company's Common Stock. Each of the foregoing options was granted under the Directors' Plan at fair market value on the date of grant. See "--Employee Benefit Plans--1998 Non-Employee Directors' Stock Option Plan." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to October 1997, the Company did not have a Compensation Committee of the Board of Directors, and the entire Board participated in all compensation decisions, except that Mr. Huang did not participate in decisions relating to his compensation. In October 1997, the Board formed the Company's Compensation Committee to review and recommend to the Board the compensation and benefits for the Company's executive officers and administer the Company's stock purchase and stock option plans. Certain of the Company's directors, or affiliated entities, have purchased securities of the Company. See "Certain Transactions" and "Principal Stockholders." EXECUTIVE COMPENSATION The following table sets forth the compensation awarded or paid by the Company during the fiscal year ended December 31, 1997 to (i) the Company's Chief Executive Officer and (ii) the four other most highly compensated officers receiving compensation in excess of $100,000 in fiscal 1997 hereinafter (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE(/1/)
LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS ------------ ------------ SECURITIES UNDERLYING NAME AND PRINCIPAL POSITION SALARY ($) OPTIONS (#) --------------------------- ------------ ------------ Jen-Hsun Huang........................................ $149,134 0 President and Chief Executive Officer Jeffrey D. Fisher..................................... 202,122 75,000 Vice President, Sales Richard J. Whitacre................................... 138,750 175,000 Vice President, Operations and Corporate Engineering Chris A. Malachowsky.................................. 135,721 0 Vice President, Engineering Curtis R. Priem....................................... 133,125 0 Chief Technical Officer
- -------- (1) In accordance with the rules of the Securities and Exchange Commission (the "Commission"), the compensation described in this table does not include medical, group life insurance or other benefits received by the Named Executive Officers which are available generally to all salaried employees of the Company and certain perquisites and other personal benefits received by the Named Executive Officers, which do not exceed the lesser of $50,000 or 10% of any such officers salary and bonus disclosed in this table. 50 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth each grant of stock options made during the fiscal year ended December 31, 1997 to each of the Named Executive Officers:
POTENTIAL REALIZABLE VALUE AT ASSUMED INDIVIDUAL GRANTS ANNUAL RATES ----------------------------------------------------------------- OF STOCK PRICE NUMBER OF APPRECIATION FOR SECURITIES PERCENTAGE OF OPTION TERM UNDERLYING TOTAL OPTIONS ($)(4) OPTIONS GRANTED IN EXERCISE PRICE EXPIRATION ------------------ NAME GRANTED(1) FISCAL 1997(2) ($/SHARE)(3) DATE 5% 10% ---- ---------- -------------- -------------- ---------- -------- -------- Jen-Hsun Huang.......... 0 --% $ -- -- --% --% Jeffrey D. Fisher....... 50,000 1.0 .36 3/23/07 25,000 .5 .36 5/12/07 Richard J. Whitacre..... 175,000 3.6 .36 3/23/07 Chris A. Malachowsky.... 0 -- -- -- -- -- Curtis R. Priem......... 0 -- -- -- -- --
- -------- (1) Options generally vest at a rate of 25% on the first anniversary of the vesting commencement date and 6.25% each quarter thereafter and have a term of 10 years. Options are immediately exercisable; however, the shares purchasable under such options are subject to repurchase by the Company at the original exercise price paid per share upon the optionee's cessation of service prior to the vesting of such shares. (2) Based on an aggregate of 4,841,232 shares subject to options granted to persons who were employees of the Company in the fiscal year ended December 31, 1997, including the Named Executive Officers. (3) The exercise price per share of each option was equal to the fair market value of the Common Stock on the date of grant as determined by the Board of Directors. (4) The potential realizable value is calculated based on the term of the option at the time of grant (10 years) and an assumed initial public offering price of $ per share. Stock price appreciation of 5% and 10% is assumed pursuant to rules promulgated by the Securities and Exchange Commission and does not represent the Company's prediction of its stock price performance. The potential realizable value is calculated based on the deemed value at the date of grant and assumes that the deemed value appreciates from the date of grant at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND 1997 YEAR-END OPTION VALUES The following table sets forth for each of the Named Executive Officers the number and value of securities underlying unexercised options held by the Named Executive Officers at December 31, 1997:
SHARES NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED ACQUIRED ON UNEXERCISED OPTIONS AT DECEMBER IN-THE-MONEY OPTIONS AT EXERCISE VALUE 31, 1997 (#) DECEMBER 31, 1997 ($)(2) NAME (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE - ---- ----------- ------------ ------------------------------- ------------------------- Jen-Hsun Huang.......... 0 $ -- -- $ -- Jeffrey D. Fisher....... 0 0 135,000/0 376,650/0 Richard J. Whitacre..... 30,000 0 205,000/0 571,950/0 Chris A. Malachowsky.... 0 -- -- -- Curtis R. Priem......... 0 -- -- --
- -------- (1) Options are immediately exercisable; however, the shares purchasable under such options are subject to repurchase by the Company at the original exercise price paid per share upon the optionee's cessation of service prior to the vesting of such shares. (2) Based on the difference between the fair market value of the Common Stock at December 31, 1997 as determined by the Board of Directors and the exercise price. 51 EMPLOYEE BENEFIT PLANS 1998 EQUITY INCENTIVE PLAN The Company's 1998 Equity Incentive Plan (the "Incentive Plan") was adopted in February 1998 and amended in March 1998 and replaces the Company's Equity Incentive Plan adopted in May 1993 (as amended in March 1995, January 1996 and December 1997). An aggregate of 15,000,000 shares of Common Stock currently are authorized for issuance under the Incentive Plan. However, each year on January 1, starting with January 1, 1999, the aggregate number of shares of Common Stock that are available for issuance under the Incentive Plan will automatically be increased to that number of shares of Common Stock that is equal to 5% of the Company's outstanding shares of Common Stock on such date. The Incentive Plan provides for the grant of incentive stock options, as defined under the Internal Revenue Code of 1986, as amended (the "Code"), to employees (including officers and employee directors) and nonstatutory stock options, restricted stock purchase awards and stock bonuses to employees (including officers and employee directors), directors and consultants of the Company and its affiliates. The Incentive Plan is administered by the Compensation Committee, which determines the recipients and types of awards to be granted, including the exercise price, number of shares subject to the award and the exercisability thereof. The terms of options granted under the Incentive Plan may not exceed 10 years. The Compensation Committee determines the exercise price of options granted under the Incentive Plan. However, the exercise price for an incentive stock option cannot be less than 100% of the fair market value of the Common Stock on the date of the option grant, and the exercise price for a nonstatutory stock option cannot be less than 85% of the fair market value of the Common Stock on the date of the option grant. Options granted under the Incentive Plan vest at the rate specified in the option agreement. Generally, the optionee may not transfer a stock option other than by will or the laws of descent or distribution. However, an optionee may designate a beneficiary who may exercise the option following the optionee's death. An optionee whose service relationship with the Company or any affiliate ceases for any reason may exercise vested options for the term provided in the option agreement. No incentive stock option (and prior to the Company's stock being publicly traded, no nonstatutory stock option) may be granted to any person who, at the time of the grant, owns (or is deemed to own) stock possessing more than 10% of the total combined voting power of the Company or any affiliate of the Company, unless the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant and the term of the option does not exceed five years from the date of grant. In addition, the aggregate fair market value, determined at the time of grant, of the shares of Common Stock with respect to which incentive stock options are exercisable for the first time by an optionee during any calendar year (under the Incentive Plan and all other stock plans of the Company and its affiliates) may not exceed $100,000. When the Company becomes subject to Section 162(m) of the Code (which denies a deduction to publicly held corporations for certain compensation paid to specified employees in a taxable year to the extent that the compensation exceeds $1,000,000), no person may be granted options under the Incentive Plan covering more than 1,000,000 shares of Common Stock in any calendar year. Shares subject to stock awards that have expired or otherwise terminated without having been exercised in full again become available for the grant of awards under the Incentive Plan. The Compensation Committee has the authority to reprice outstanding options or to offer optionees the opportunity to replace outstanding options with new options for the same or a different number of shares. Both the original and new options will count toward the Code Section 162(m) limitation set forth above. Restricted stock purchase awards granted under the Incentive Plan may be granted pursuant to a repurchase option in favor of the Company in accordance with a vesting schedule and at a price determined by the Compensation Committee. Stock bonuses may be awarded in consideration of past services without a purchase payment. Rights under a stock bonus or restricted stock bonus agreement generally may not be transferred other 52 than by will or the laws of descent and distribution during such period as the stock awarded pursuant to such an agreement remains subject to the agreement. If there is any sale of substantially all of the Company's assets, any merger or any consolidation in which the Company is not the surviving corporation, all outstanding awards under the Incentive Plan either will be assumed or substituted for by any surviving entity. If the surviving entity determines not to assume or substitute for such awards, the time during which awards held by persons still serving the Company or an affiliate may be exercised will be accelerated and the awards terminated if not exercised prior to the sale of assets, merger or consolidation. As of March 29, 1998, 4,682,110 shares of Common Stock had been issued upon the exercise of options granted under the Incentive Plan, options to purchase 5,996,833 shares of Common Stock were outstanding and 3,911,457 shares remained available for future grant. The Incentive Plan will terminate in February 2008 unless terminated by the Board before then. As of March 29, 1998, stock awards or restricted stock covering 647,932 shares of the Company's Common Stock had been granted under the Incentive Plan. Of such shares, 238,332 shares have been repurchased by the Company and returned to the Incentive Plan. 1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN The Directors' Plan was adopted in February 1998 and amended in March 1998 and provides for the automatic grant of options to purchase shares of Common Stock to non-employee directors of the Company who are not employees of or consultants to the Company or an affiliate of the Company (a "Non-Employee Director"). The Compensation Committee administers the Directors' Plan. The aggregate number of shares of Common Stock that may be issued pursuant to options granted under the Directors' Plan is 300,000 shares. Pursuant to the terms of the Directors' Plan, after the effective date of the initial public offering of the Company's Common Stock, each person who is elected or appointed for the first time to be a Non-Employee Director automatically shall, upon the date of his or her initial election or appointment to be a Non-Employee Director by the Board or stockholders of the Company, be granted an option to purchase Fifty Thousand (50,000) shares of Common Stock (an "Initial Grant"). On March 30, 1998 and on the day following each Annual Meeting of Stockholders of the Company ("Annual Meeting"), commencing with the Annual Meeting in 1999, each person who is then a Non-Employee Director automatically shall be granted one or more options to purchase shares of Common Stock as follows: (i) Each Non-Employee Director shall be granted an option to purchase Twenty Thousand (20,000) shares of Common Stock of the Company (an "Annual Grant"); provided, however, that if the person has not been serving as a Non- Employee Director for the entire period since the prior Annual Meeting (or since March 30, 1997 for the grant on March 30, 1998), then the number of shares granted shall be reduced pro rata for each full quarter prior to the date of grant during which such person did not serve as a Non-Employee Director; and (ii) each Non-Employee Director who is a member of a committee of the Board shall be granted an option to purchase Five Thousand (5,000) shares of Common Stock of the Company for each such committee (a "Committee Grant"); provided, however, that if the person has not been serving on such committee since the prior Annual Meeting (or since March 30, 1997 for the grant on March 30, 1998), then the number of shares granted shall be reduced pro rata for each full quarter prior to the date of grant during which such person did not serve as a Non-Employee Director. Initial Grants will vest monthly over the four-year period following the date of grant such that the entire Initial Grant shall become exercisable on the fourth anniversary of the date of grant. With respect to Annual Grants and Committee Grants, if the optionee has attended at least 75% of the regularly scheduled meetings of the Board or the committee, as applicable, held between the date of grant of the option and the one-year anniversary of the date of grant of the option, then such option shall vest and become exercisable in full on the one-year anniversary of the date of grant. If the optionee's service as a director or committee member, as the case may be, terminates between the date of grant of the option and the one-year anniversary of the date of grant 53 of the option due to the disability or death of the optionee, then the option shall immediately vest and become exercisable on a monthly pro rata basis. If the director fails to attend at least 75% of the regularly scheduled meetings of the Board or the committee, as applicable, then such optionee's option shall vest annually over the four-year period following the date of grant at the rate of 10% per year for the first three years and 70% for the fourth year, such that the entire option shall become exercisable on the four-year anniversary of the date of grant of the option. The exercise price of the options granted under the Directors' Plan will be equal to the fair market value of the Common Stock on the date of grant. No option granted under the Directors' Plan may be exercised after the expiration of ten years from the date it was granted. Options granted under the Directors' Plan generally are non-transferable except to family members, a family trust, a family partnership or a family limited liability company. However, an optionee may designate a beneficiary who may exercise the option following the optionee's death. An optionee whose service relationship with the Company or any affiliate (whether as a Non-Employee Director of the Company or subsequently as an employee, director or consultant of either the Company or an affiliate) ceases for any reason may exercise vested options for the term provided in the option agreement (12 months generally, 18 months in the event of death). If there is any sale of substantially all of the Company's assets, any merger or any consolidation in which the Company is not the surviving corporation or other change in control of the Company, all outstanding awards under the Directors' Plan either will be assumed or substituted for by any surviving entity. If the surviving entity determines not to assume or substitute for such awards, the awards shall terminate if not exercised prior to such sale of assets, merger or consolidation. As of March 31, 1998, options to purchase 93,750 shares of Common Stock were outstanding and 206,250 shares remained available for future grant under the Directors' Plan. Unless terminated sooner, the Directors' Plan will terminate in February 2008. EMPLOYEE STOCK PURCHASE PLAN In February 1998, the Board approved the Employee Stock Purchase Plan (the "Purchase Plan"), covering an aggregate of 500,000 shares of Common Stock. The Purchase Plan is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the Code. Under the Purchase Plan, the Board may authorize participation by eligible employees, including officers, in periodic offerings following the adoption of the Purchase Plan. The offering period for any offering will be no longer than 27 months. Employees are eligible to participate if they are employed by the Company or an affiliate of the Company designated by the Board. Employees who participate in an offering generally can have up to 10% of their earnings withheld pursuant to the Purchase Plan and applied, on specified dates determined by the Board, to the purchase of shares of Common Stock. The Board may increase this percentage in its discretion, up to 15%. The price of Common Stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the Common Stock on the commencement date of each offering period or the relevant purchase date. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with the Company. In the event of certain changes of control, the Board has discretion to provide that each right to purchase Common Stock will be assumed or an equivalent right substituted by the successor corporation, or the Board may shorten the offering period and provide for all sums collected by payroll deductions to be applied to purchase stock immediately prior to the change in control. The Purchase Plan will terminate at the Board's direction or when all of the shares reserved for issuance under the Purchase Plan have been issued. 401(K) PLAN The Company maintains the NVIDIA Corporation 401(k) Retirement Plan (the "401(k) Plan") for eligible employees ("Participants"). A Participant may contribute up to 20% of his or her total annual compensation to 54 the 401(k) Plan, up to a statutorily prescribed annual limit. The annual limit for 1998 is $10,000. Each Participant is fully vested in his or her deferred salary contributions. Participant contributions are held and invested by the 401(k) Plan's trustee. The Company may make discretionary contributions as a percentage of Participant contributions, subject to established limits. To date, the Company has made no contributions to the 401(k) Plan on behalf of the Participants. The 401(k) Plan is intended to qualify under Section 401 of the Code, so that contributions by employees or by the Company to the 401(k) Plan, and income earned on the 401(k) Plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by the Company, if any, will be deductible by the Company when made. 55 CERTAIN TRANSACTIONS In August 1997, Harvey C. Jones, Jr., a director of the Company, purchased 24,334 shares of the Company's Series D Preferred Stock for an aggregate purchase price of $127,997. The Company sold these securities pursuant to a preferred stock purchase agreement and an investors' rights agreement on substantially the same terms as the other investors of Series D Preferred Stock, including registration rights, information rights and a right of first refusal, among other provisions standard in venture capital financings. Pursuant to an agreement between the Company and certain stockholders of the Company, in August 1997, the Company granted certain rights with respect to the registration of shares held by Messrs. Coxe, Jones and Miller, each of whom is a director of the Company, and shares held by and Sequoia Capital VI and its related entities and Sutter Hill Ventures and its related entities, both of which are holders of more than 5% of the Company's Common Stock. Mr. Stevens, a director of the Company, is a general partner of Sequoia Capital, and Mr. Coxe is a general partner of Sutter Hill Ventures. See "Description of Capital Stock--Registration Rights." INDEMNIFICATION AND LIMITATION OF DIRECTOR AND OFFICER LIABILITY In February 1998, the Board authorized the Company to enter into indemnity agreements with each of the Company's directors and executive officers. The form of indemnity agreement provides that the Company will indemnify against any and all expenses of the director or executive officer who incurred such expenses because of his or her status as a director or executive officer, to the fullest extent permitted by the Company's Bylaws and Delaware law. The Company's Certificate of Incorporation (the "Certificate") and Bylaws contain certain provisions relating to the limitation of liability and indemnification of directors and officers. The Certificate provides that directors of the Company shall not be personally liable to the Company or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (i) for any breach of the directors' duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derives any improper personal benefit. The Certificate also provides that if the Delaware General Corporation Law is amended after the approval by the Company's stockholders of the Certificate to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of the Company's directors shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law. The foregoing provisions of the Certificate are not intended to limit the liability of directors or officers for any violation of applicable federal securities laws. In addition, as permitted by Section 145 of the Delaware General Corporation Law, the Bylaws of the Company provide that (i) the Company is required to indemnify its directors and executive officers to the fullest extent permitted by the Delaware General Corporation Law, (ii) the Company may, in its discretion, indemnify other officers, employees and agents as set forth in the Delaware General Corporation Law, (iii) to the fullest extent permitted by the Delaware General Corporation Law, the Company is required to advance all expenses incurred by its directors and executive officers in connection with a legal proceeding (subject to certain exceptions), (iv) the rights conferred in the Bylaws are not exclusive, (v) the Company is authorized to enter into indemnification agreements with its directors, officers, employees and agents and (vi) the Company may not retroactively amend the Bylaws provisions relating to indemnity. 56 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of March 29, 1998, and as adjusted to reflect the sale of the shares of Common Stock offered hereby by (i) each of the Company's Named Executive Officers, (ii) each of the Company's directors, (iii) each holder of more than 5% of the Company's Common Stock and (iv) all current directors and executive officers as a group.
PERCENTAGE OF SHARES BENEFICIALLY OWNED(1) SHARES ------------------------ BENEFICIALLY PRIOR TO AFTER BENEFICIAL OWNERS OWNED(1) OFFERING OFFERING - ----------------- ------------ ---------- ---------- Entities associated with Sequoia Capital VI(2)........................ 3,095,902 13.2% % 3000 Sand Hill Road Suite 280, Building 4 Menlo Park, California 94025 Jen-Hsun Huang(3)(4).................. 3,000,000 12.8 Chris A. Malachowsky(3)(5)............ 3,000,000 12.8 Curtis R. Priem(3).................... 3,000,000 12.8 Entities associated with Sutter Hill Ventures(6)(9)....................... 2,786,090 11.9 755 Page Mill Road, Suite A-200 Palo Alto, California 94304 Jeffrey D. Fisher(7).................. 360,200 1.5 Richard J. Whitacre(8)................ 387,800 1.6 Tench Coxe(6)(9)...................... 2,786,090 12.1 Harvey C. Jones, Jr.(10).............. 269,334 1.1 William J. Miller(11)................. 181,844 * A. Brooke Seawell..................... -- * Mark A. Stevens(2)(12)................ 3,145,902 13.4 All directors and executive officers as a group(10 persons)(13)........... 16,131,170 68.0
- -------- *Less than 1%. (1) Percentage of beneficial ownership is based on 23,468,797 shares of Common Stock outstanding on an as-converted basis as of March 29, 1998 and on shares of Common Stock outstanding after the completion of this offering. Shares of Common Stock subject to options currently exercisable or exercisable within 60 days of March 29, 1998 are deemed outstanding for the purpose of computing the percentage ownership of the person holding such options but are not deemed outstanding for computing the percentage ownership of any other person. Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. (2) Includes (i) 2,566,589 shares held by Sequoia Capital VI, (ii) 258,947 shares held by Sequoia Capital Growth Fund, (iii) 141,021 shares held by Sequoia Technology Partners VI, (iv) 81,237 shares held by Sequoia XXIII, (v) 27,778 shares held by Sequoia XXIV, (vi) 16,528 shares held by Sequoia Technology Partners III, (vii) 2,433 shares held by SQP 1997 and (viii) 1,369 shares held by Sequoia 1997. Mr. Stevens, a director of the Company, is a general partner of Sequoia Capital VI and a general partner of Sequoia Technology Partners VI, and therefore may be deemed to beneficially own the shares currently owned by such entities. Mr. Stevens disclaims beneficial ownership of the shares held by such entities, except to the extent of his pecuniary interest therein. 57 (3) The address for Messrs. Huang, Malachowsky and Priem is: c/o NVIDIA Corporation, 1226 Tiros Way, Sunnyvale, California 94086. (4) Includes 2,308,900 shares held by The Jen-Hsun and Lori Huang Living Trust dated May 1, 1995, of which Mr. Huang is the trustee and 250,600 shares held by J. and L. Huang Investments, L.P., of which Mr. Huang and his wife are general partners. Also includes 220,000 shares held by Karen Mills Gambee, as Trustee of The Jen-Hsun Huang and Lori Lynn Huang 1995 Irrevocable Children's Trust and 220,500 shares held by various family members, as to which Mr. Huang does not have voting or dispositive power or beneficial ownership thereof. (5) Includes 2,052,000 shares held by The Chris and Melody Malachowsky Living Trust dated October 20, 1994, of which Mr. Malachowsky is the trustee and 238,500 shares held by Malachowsky Investments L.P., of which Mr. Malachowsky and his wife are general partners. Also includes 660,000 shares held by John M. Scott, as Trustee of The Chris Malachowsky and Melody Malachowsky 1994 Irrevocable Trust and 49,500 shares held by various family members, as to which Mr. Malachowsky does not have voting or dispositive power thereof. (6) Includes 1,813,275 shares held by Sutter Hill Ventures, a California Limited Partnership ("Sutter Hill"). Mr. Coxe, a director of the Company, shares voting and investing power with four other managing directors of Sutter Hill Ventures LLC, the general partner of Sutter Hill. Includes 972,815 shares held of record by the five managing directors of Sutter Hill Ventures LLC and their related family entities. Mr. Coxe disclaims beneficial ownership of the shares held by the other persons and entities associated with Sutter Hill, except to the extent of his pecuniary interest therein. (7) Includes 225,200 shares subject to a right of repurchase that expires ratably through July 1998. Includes 135,000 shares of Common Stock issuable upon the early exercise of options vesting through May 2001. (8) Includes 152,800 and 30,000 shares subject to rights of repurchase that expire ratably through July 1998 and August 2000, respectively. Includes 205,000 shares of Common Stock issuable upon the early exercise of options vesting through May 2001. (9) Includes 50,000 shares subject to a right of repurchase that expires ratably through July 2000. (10) Includes 70,000 shares subject to a right of repurchase that expires ratably through August 2000. (11) Includes 75,000 and 50,000 shares subject to rights of repurchase that expire ratably through November 1998 and June 2000, respectively. (12) Includes 50,000 shares subject to a right of repurchase that expires ratably through July 2000. (13) Includes 340,000 shares issuable upon exercise of options held by all directors and executive officers within 60 days of March 29, 1998. See footnotes (7) and (8). 58 DESCRIPTION OF CAPITAL STOCK Upon the closing of this offering, the authorized capital stock of the Company will consist of 200,000,000 shares of Common Stock, par value $.001 per share, and 2,000,000 shares of Preferred Stock, par value $.001 per share ("Preferred Stock"). COMMON STOCK As of March 29, 1998, there were 23,468,797 shares of Common Stock (including shares of Preferred Stock that will be converted into Common Stock upon completion of this offering) outstanding held of record by 196 stockholders. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Subject to preferences that may be applicable to any outstanding shares of the Preferred Stock, the holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution, or winding up of the Company, holders of the Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of Preferred Stock. Holders of Common Stock have no preemptive rights and no right to convert their Common Stock into any other securities. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and all shares of Common Stock to be outstanding upon the completion of this offering will be, fully paid and non-assessable. PREFERRED STOCK Pursuant to the Restated Certificate the Board of Directors has the authority, without further action by the stockholders, to issue up to 2,000,000 shares of Preferred Stock in one or more series and to fix the designations, powers, preferences, privileges, and relative participating, optional, or special rights and the qualifications, limitations, or restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of the Common Stock. The Board of Directors, without stockholder approval, can issue Preferred Stock with voting, conversion, or other rights that could adversely affect the voting power and other rights of the holders of Common Stock. Preferred Stock could thus be issued quickly with terms calculated to delay or prevent a change in control of the Company or make removal of management more difficult. Additionally, the issuance of Preferred Stock may have the effect of decreasing the market price of the Common Stock, and may adversely affect the voting and other rights of the holders of Common Stock. Upon the completion of this offering, there will be no shares of Preferred Stock outstanding and the Company has no current plans to issue any of the authorized Preferred Stock. REGISTRATION RIGHTS Pursuant to an agreement between the Company and the holders (or their permitted transferees) ("Holders") of approximately 9,327,087 shares of Common Stock (assuming the conversion of all outstanding Preferred Stock upon the completion of this offering) and warrants to purchase 29,706 shares of Common Stock, the Holders are entitled to certain rights with respect to the registration of such shares under the Securities Act. If the Company proposes to register its Common Stock, subject to certain exceptions, under the Securities Act, the Holders are entitled to notice of the registration and are entitled at the Company's expense to include such shares therein, provided that the managing underwriters have the right to limit the number of such shares included in the registration. The registration rights with respect to this offering have been waived. In addition, certain of the Holders may require the Company, at its expense, on no more than one occasion, to file a registration statement under the Securities Act with respect to their shares of Common Stock. Such rights may not be exercised until 60 days after the completion of this offering. Further, certain Holders may require the Company, once every 12 months and, on no more than two occasions, at the Company's expense to register the 59 shares on Form S-3 when such form becomes available to the Company, subject to certain conditions and limitations. Such right expires on the fifth anniversary of completion of this offering. ANTI-TAKEOVER EFFECTS OF PROVISIONS OF CHARTER DOCUMENTS AND DELAWARE LAW CHARTER DOCUMENTS The Company's Certificate of Incorporation (the "Certificate") and Bylaws include a number of provisions that may have the effect of deterring hostile takeovers or delaying or preventing changes in control or management of the Company. First, the Certificate provides that all stockholder action must be effected at a duly called meeting of holders and not by a consent in writing. Second, the Bylaws provide that special meetings of the holders may be called only by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a resolution adopted by the Board of Directors. Third, the Certificate and the Bylaws provide for a classified Board of Directors. The Certificate includes a provision requiring cumulative voting for directors only if required by applicable California law. Under cumulative voting, a minority stockholder holding a sufficient percentage of a class of shares may be able to ensure the election of one or more directors. As a result of the provisions of the Certificate and applicable California and Delaware law, at any annual meeting whereby the Company had at least 800 stockholders as of the end of the fiscal year prior to the record date for such annual meeting, stockholders will not be able to cumulate votes for directors. Finally, the Bylaws establish procedures, including advance notice procedures with regard to the nomination of candidates for election as directors and stockholder proposals. These provisions of the Certificate and Bylaws could discourage potential acquisition proposals and could delay or prevent a change in control or management of the Company. Such provisions also may have the effect of preventing changes in the management of the Company. See "Risk Factors-- Effects of Certain Charter and Bylaw Provisions" and "Management." DELAWARE TAKEOVER STATUTE The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law ("Section 203"). In general, Section 203 prohibits a publicly held Delaware corporation, such as the Company shall become upon the completion of this offering from engaging in a "business combination" with a person characterized as an "interested stockholder" for a period of three years after the date of the transaction pursuant to which such person became an interested stockholder, unless the business combination is approved in a manner prescribed by Delaware law. For purposes of Section 203, a business combination includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the Company's voting stock. TRANSFER AGENT AND REGISTRAR ChaseMellon Shareholder Services, L.L.C. has been appointed as the transfer agent and registrar for the Company's Common Stock. 60 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices from time to time. Furthermore, since only a limited number of shares will be available for sale following this offering as a result of certain contractual and legal restrictions on resale (as described below), sales of substantial amounts of Common Stock of the Company in the public market after these restrictions lapse could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon the completion of this offering, the Company will have outstanding an aggregate of shares of Common Stock, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options and warrants. Of these shares, all of the shares sold in this offering will be freely tradable without restrictions or further registration under the Securities Act, unless such shares are purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act (the "Affiliates"). The remaining 23,468,797 shares of Common Stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration pursuant to Rules 144, 144(k) or 701 promulgated under the Securities Act, which are summarized below. All officers and directors and certain stockholders holding an aggregate of 23,352,560 shares of the Company's Common Stock have agreed, subject to certain exceptions, not to offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly of indirectly (or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of), any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock, for a period of 180 days after the date of this Prospectus, without the prior written consent of Morgan Stanley & Co. Incorporated. Morgan Stanley & Co. Incorporated may in its sole discretion choose to release a certain number of these shares from such restrictions prior to the expiration of such 180-day period. Approximately 5,000,000 shares of Common Stock of the Company (less shares available for sale within 90 days following the date of this Prospectus), which does not include any shares held by officers and directors, will be released from such contractual restrictions following 90 days after the date of this Prospectus. As a result of such contractual restrictions and the provisions of Rule 144 and 701, the Restricted Shares will be available for sale in the public market as follows: (i) 47,500 shares will be eligible for immediate sale on the date of this Prospectus; (ii) 4,952,500 shares will be eligible for sale 90 days after the date of this Prospectus; (iii) 17,365,771 shares will be eligible for sale upon expiration of lock-up agreements 180 days after the date of this Prospectus and (iv) the remaining shares will be eligible for sale from time to time thereafter upon expiration of the Company's right to repurchase such shares . In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year (including the holding period of any prior owner except an Affiliate) would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) 1% of the number of shares of Common Stock then outstanding (which will equal approximately shares immediately after this offering); or (ii) the average weekly trading volume of the Common Stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an Affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner except an Affiliate), is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144; therefore, unless otherwise contractually restricted, shares which qualify as "144(k) shares" on the date of this Prospectus may be sold immediately upon the completion of this offering. Subject to certain limitations on the aggregate offering price of a transaction and other conditions, employees, directors, officers, consultants or advisors may rely on Rule 701 with respect to the resale of securities originally 61 purchased from the Company prior to the date the issuer becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. In addition, the Securities and Exchange Commission has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options (including exercises after the date of this Prospectus). Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this Prospectus, may be sold by persons other than Affiliates subject only to the manner of sale provisions of Rule 144, and by Affiliates under Rule 144 without compliance with its holding period requirements. Upon completion of this offering, the holders of approximately 9,356,793 shares of Common Stock currently outstanding or issuable upon conversion of Preferred Stock, or their transferees, will be entitled to certain rights with respect to the registration of such shares under the Securities Act. See "Description of Capital Stock--Registration Rights." Registration of such shares under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act (except for share purchases by affiliates) immediately upon the effectiveness of such registration. The Company intends to file a registration statement under the Securities Act covering 10,708,290 shares of Common Stock reserved or to be reserved for issuance under the Equity Incentive Plan, the Purchase Plan and the Directors' Plan. See "Management--Employee Benefit Plans." Such registration statement is expected to be filed and become effective as soon as practicable after the effective date of this offering. Accordingly, shares registered under such registration statement will, subject to Rule 144 volume limitations applicable to Affiliates, be available for sale in the open market, beginning 180 days after the date of the Prospectus, unless such shares are subject to vesting restrictions with the Company. 62 UNDERWRITERS Under the terms and subject to the conditions contained in an Underwriting Agreement (the "Underwriting Agreement"), the Underwriters named below (the "Underwriters"), for whom Morgan Stanley & Co. Incorporated, Hambrecht & Quist LLC and CIBC Oppenheimer Corp. are acting as representatives (the "Representatives"), have agreed severally to purchase, and the Company has agreed to sell to them, severally, the respective number of shares of Common Stock set forth opposite their respective names below:
NUMBER OF NAME SHARES - ---- ------ Morgan Stanley & Co. Incorporated........................................ Hambrecht & Quist LLC.................................................... CIBC Oppenheimer Corp.................................................... ---- Total................................................................ ====
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are taken. The Underwriters initially propose to offer part of the shares of Common Stock directly to the public at the initial public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $ per share under the public offering price. Any Underwriter may allow, and such dealers may reallow, a concession not in excess of $ per share to other Underwriters or to certain dealers. After the initial offering of the shares of Common Stock, the offering price and other selling terms may from time to time be varied by the Representatives. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of additional shares of Common Stock at the initial public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of Common Stock offered hereby. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of Common Stock as the number set forth next to such Underwriter's name in the preceding table bears to the total number of shares of Common Stock set forth next to the names of all Underwriters in the preceding table. The Underwriters have informed the Company that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of Common Stock offered by them. Each of the Company and the directors, executive officers, certain other stockholders and option holders of the Company has agreed, subject to certain exceptions that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not during the period ending 180 days after the date of this Prospectus (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer, lend or dispose 63 of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, except under certain limited circumstances. The restrictions described in this paragraph do not apply to (a) the sale of Shares to the Underwriters, (b) the issuance by the Company of shares of Common Stock upon exercise of an option or a warrant outstanding on the date of this Prospectus and described as such in the Prospectus, (c) the issuance by the Company of shares of Common Stock under the Equity Incentive Plan, the Directors' Plan and the Purchase Plan or (d) transactions by any person other than the Company relating to shares of Common Stock or other securities acquired in open market transactions after the completion of the offering of the Shares. See "Shares Eligible for Future Sale." In order to facilitate the offering of the Common Stock, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may over-allot in connection with the offering, creating a short position in the Common Stock for their own account. In addition, to cover over-allotments or to stabilize the price of the Common Stock, the Underwriters may bid for, and purchase, shares of Common Stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an Underwriter or a dealer for distributing the Common Stock in the offering, if the syndicate repurchases previously distributed Common Stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. PRICING OF THE OFFERING Prior to this offering, there has been no public market for the Common Stock or any other securities of the Company. The initial public offering price for the Common Stock will be determined by negotiations among the Company and the Representatives. Among the factors to be considered in determining the initial public offering price will be the future prospects of the Company and its industry in general, sales, earnings and certain other financial and operating information of the Company in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to those of the Company. The estimated initial public offering price range set forth on the cover page of this Preliminary Prospectus is subject to change as a result of market conditions and other factors. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Cooley Godward llp ("Cooley Godward"), San Francisco, California. Certain legal matters related to the offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. As of the date of this Prospectus, certain partners and associates of Cooley Godward own through investment partnerships an aggregate of 124,591 shares of Common Stock of the Company. James C. Gaither, a partner of Cooley Godward, owns 44,289 shares of Common Stock of the Company and has an option to purchase 50,000 shares of the Company's Common Stock. EXPERTS The financial statements of the Company as of December 31, 1996 and 1997, and for each of the years in the three-year period ended December 31, 1997, have been included in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 64 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and such Common Stock, reference is made to the Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected by anyone without charge at the Commission's principal office in Washington, D.C., and copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and copies of all or any part of the Registration Statement may be obtained from such offices upon payment of the fees prescribed by the Commission. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the site is http://www.sec.gov. 65 NVIDIA CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of KPMG Peat Marwick LLP, Independent Auditors..................... F-2 Balance Sheets as of December 31, 1996 and 1997 and March 29, 1998 (unaudited).............................................................. F-3 Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997 and Three Months Ended March 30, 1997 (unaudited) and March 29, 1998 (unaudited).............................................................. F-4 Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1996 and 1997 and Three Months Ended March 29, 1998 (unaudited).......... F-5 Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 and Three Months Ended March 30, 1997 (unaudited) and March 29, 1998 (unaudited).............................................................. F-6 Notes to Financial Statements............................................. F-7
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders NVIDIA Corporation: We have audited the accompanying balance sheets of NVIDIA Corporation (the Company) as of December 31, 1996 and 1997, and the related statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NVIDIA Corporation as of December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Mountain View, California February 17, 1998 Except as to Note 8 which is as of April 16, 1998 F-2 NVIDIA CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------ MARCH 29, 1996 1997 1998 -------- -------- ----------- (UNAUDITED) ----------- ASSETS ------ Current assets: Cash and cash equivalents.................... $ 3,133 $ 6,551 $ 8,640 Accounts receivable.......................... 1,041 12,487 16,665 Inventory.................................... -- -- 2,523 Prepaid expenses and other current assets.... 104 303 1,101 -------- -------- -------- Total current assets..................... 4,278 19,341 28,929 Property and equipment, net.................... 1,144 5,536 7,648 Deposits and other assets...................... 103 161 161 -------- -------- -------- $ 5,525 $ 25,038 $ 36,738 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable............................. $ 277 $ 11,572 $ 19,331 Accrued liabilities.......................... 2,872 3,245 3,654 Income taxes payable......................... -- -- 728 Current portion of capital lease obligations. 722 1,434 1,625 -------- -------- -------- Total current liabilities................ 3,871 16,251 25,338 -------- -------- -------- Capital lease obligations, less current portion....................................... 617 1,891 2,143 -------- -------- -------- Commitments.................................... -- -- -- Stockholders' equity: Convertible preferred stock, $.001 par value; 10,000,000 shares authorized; Shares issued and outstanding 7,888,275 in 1996, 9,327,087 in 1997 and 9,327,087 on March 29, 1998; aggregate liquidation preference of $19,827 in 1997 and 1998..... 8 9 9 Common stock, $.001 par value; 200,000,000 shares authorized; 11,567,374, 14,140,585 and 14,141,710 shares issued and outstanding in 1996, 1997 and March 29, 1998, respectively................................ 12 14 14 Additional paid-in capital................... 12,317 22,902 23,211 Deferred compensation........................ -- (2,038) (2,166) Accumulated deficit.......................... (11,300) (13,991) (11,811) -------- -------- -------- Total stockholders' equity............... 1,037 6,896 9,257 -------- -------- -------- $ 5,525 $ 25,038 $ 36,738 ======== ======== ========
See accompanying notes to financial statements. F-3 NVIDIA CORPORATION STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, ------------------- ------------------------- MARCH 30, MARCH 29, 1995 1996 1997 1997 1998 ------- ------- ------- --------- --------- (UNAUDITED) Revenue: Product....................... $ 1,103 $ 3,710 $27,280 $ 65 $33,210 Royalty....................... 79 202 1,791 -- 4,452 ------- ------- ------- ------- ------- Total revenue............... 1,182 3,912 29,071 65 37,662 Cost of revenue................. 1,549 3,038 21,226 208 27,559 ------- ------- ------- ------- ------- Gross profit (loss)............. (367) 874 7,845 (143) 10,103 ------- ------- ------- ------- ------- Operating expenses: Research and development...... 2,426 1,218 6,632 616 3,815 Sales, general and administrative............... 3,677 2,649 3,773 385 3,341 ------- ------- ------- ------- ------- Total operating expenses.... 6,103 3,867 10,405 1,001 7,156 ------- ------- ------- ------- ------- Operating income (loss)..... (6,470) (2,993) (2,560) (1,144) 2,947 Interest and other income (expense), net................. 93 (84) (131) (32) (39) ------- ------- ------- ------- ------- Income (loss) before tax expense........................ (6,377) (3,077) (2,691) (1,176) 2,908 Income tax expense.............. -- -- -- -- 728 ------- ------- ------- ------- ------- Net income (loss)........... (6,377) (3,077) (2,691) (1,176) 2,180 ======= ======= ======= ======= ======= Basic net income (loss) per share.......................... $ (.56) $ (.27) $ (.21) $ (.10) $ .15 ======= ======= ======= ======= ======= Diluted net income (loss) per share.......................... $ (.56) $ (.27) $ (.21) $ (.10) $ .08 ======= ======= ======= ======= ======= Shares used in basic per share computation.................... 11,365 11,383 12,677 11,578 14,142 Shares used in diluted per share computation.................... 11,365 11,383 12,677 11,578 25,729
See accompanying notes to financial statements. F-4 NVIDIA CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
TOTAL PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED ACCUMU- STOCK- ---------------- ----------------- PAID-IN COMPEN- LATED HOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL SATION DEFICIT EQUITY --------- ------ ---------- ------ ---------- -------- -------- -------- Balances, December 31, 1994................... 6,693,831 $ 7 11,365,300 $11 $ 6,456 $ -- $ (1,846) $ 4,628 Issuance of Series B preferred stock........ 416,667 -- -- -- 750 -- -- 750 Exercise of Series B warrants............... 13,888 -- -- -- 25 -- -- 25 Issuance of Series C preferred stock, net of issuance costs of $14.. 750,000 1 -- -- 4,985 -- -- 4,986 Net loss................ -- -- -- -- -- -- (6,377) (6,377) --------- --- ---------- --- ------- ------- -------- ------- Balances, December 31, 1995................... 7,874,386 8 11,365,300 11 12,216 -- (8,223) 4,012 Exercise of Series B warrants............... 13,889 -- -- -- 25 -- -- 25 Issuance of common stock and stock options for services............... -- -- 2,200 -- 25 -- -- 25 Issuance of common stock upon exercise of stock options................ -- -- 199,874 1 51 -- -- 52 Net loss................ -- -- -- -- -- -- (3,077) (3,077) --------- --- ---------- --- ------- ------- -------- ------- Balances, December 31, 1996................... 7,888,275 8 11,567,374 12 12,317 -- (11,300) 1,037 Issuance of Series D preferred stock, net of issuance costs of $30.. 1,438,812 1 -- -- 7,537 -- -- 7,538 Grant of common stock options for lease financing and consulting services.... -- -- -- -- 120 -- -- 120 Issuance of common stock upon exercise of stock options................ -- -- 2,573,211 2 828 -- -- 830 Deferred compensation related to grant of common stock options... -- -- -- -- 2,100 (2,100) -- -- Amortization of deferred compensation........... -- -- -- -- -- 62 -- 62 Net loss................ -- -- -- -- -- -- (2,691) (2,691) --------- --- ---------- --- ------- ------- -------- ------- Balances, December 31, 1997................... 9,327,087 9 14,140,585 14 22,902 (2,038) (13,991) 6,896 Issuance of common stock upon exercise of stock options(1)............. -- -- 1,125 -- 4 -- -- 4 Deferred compensation related to grant of common stock options (1) ........... -- -- -- -- 305 (305) -- -- Amortization of deferred compensation (1)....... -- -- -- -- -- 177 -- 177 Net income (1).......... -- -- -- -- -- -- 2,180 2,180 --------- --- ---------- --- ------- ------- -------- ------- Balances, March 29, 1998 9,327,087 $ 9 14,141,710 $14 $23,211 $(2,166) $(11,811) $ 9,257 ========= === ========== === ======= ======= ======== =======
- -------- (1) Unaudited See accompanying notes to financial statements. F-5 NVIDIA CORPORATION STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED -------------------------- ------------------- MARCH 30, MARCH 29, 1995 1996 1997 1997 1998 ------- ------- -------- --------- --------- (UNAUDITED) Cash flows from operating activities: Net income (loss)............ $(6,377) $(3,077) $ (2,691) $(1,176) $ 2,180 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.............. 524 802 1,363 235 677 Stock options granted in exchange for lease financing and services.... 25 50 120 -- -- Amortization of deferred compensation.............. -- -- 62 -- 177 Changes in operating assets and liabilities: Accounts receivable...... (458) (24) (11,446) (1,067) (4,178) Inventory................ -- -- -- -- (2,523) Prepaid expenses and other current assets.... (592) 44 (199) (41) (798) Deposits and other assets.................. (65) (19) (58) -- -- Accounts payable......... 510 (506) 11,295 (18) 7,759 Accrued liabilities...... 300 2,451 373 1,132 409 Income taxes payable..... -- -- -- -- 728 ------- ------- -------- ------- ------- Net cash provided by (used in) operating activities............ (6,133) (279) (1,181) (935) 4,431 ------- ------- -------- ------- ------- Cash flows used in investing activities--purchases of property and equipment........ (5) (9) (2,732) (60) (2,024) ------- ------- -------- ------- ------- Cash flows from financing activities: Net proceeds from sale of common stock................ -- 51 830 6 4 Net proceeds from sale of preferred stock............. 5,762 -- 7,538 -- -- Payments under capital leases...................... (307) (502) (1,037) (210) (322) ------- ------- -------- ------- ------- Net cash provided by (used in) financing activities............ 5,455 (451) 7,331 (204) (318) ------- ------- -------- ------- ------- Change in cash and cash equivalents................... (683) (739) 3,418 (1,199) 2,089 Cash and cash equivalents at beginning of period........... 4,555 3,872 3,133 3,133 6,551 ------- ------- -------- ------- ------- Cash and cash equivalents at end of period................. $ 3,872 $ 3,133 $ 6,551 $ 1,934 $ 8,640 ======= ======= ======== ======= ======= Cash paid for interest......... $ 152 $ 215 $ 267 $ 54 $ 84 ======= ======= ======== ======= ======= Noncash financing and investing activity--assets recorded under capital lease........... $ 1,430 $ 265 $ 3,023 $ 544 $ 765 ======= ======= ======== ======= =======
See accompanying notes to financial statements. F-6 NVIDIA CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 (UNAUDITED AS TO MARCH 29, 1998 DATA) (1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization NVIDIA Corporation (the "Company") designs, develops and markets 3D interactive graphics processors and related software for the mainstream PC market. The Company operates primarily in one business segment in the United States. Interim Financial Information The financial information presented as of and for the three months ended March 30, 1997 and March 29, 1998 is unaudited. In the opinion of management, this unaudited financial information contains all adjustments (which consist only of normal, recurring adjustments) necessary for a fair presentation. Operating results for the three months ended March 29, 1998 are not necessarily indicative of results that may be expected for the full year. Fiscal Year The Company's fiscal years ended on December 31 prior to December 31, 1997. Effective January 1, 1998, the Company changed its fiscal year end from December 31 to a 52- or 53-week year ending on the last Sunday in December. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less at the time of purchase to be cash equivalents. Inventories Inventories are stated at the lower of first-in, first-out cost or market. Inventories at March 29, 1998 primarily consisted of finished goods. Inventories were immaterial as of December 31, 1996 and 1997. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method based on estimated useful lives, generally three to four years. Depreciation expense includes the amortization of assets recorded under capital leases. Leasehold improvements and assets recorded under capital leases are amortized over the shorter of the lease term or the estimated useful life of the asset. Software Development Costs Software development costs are expensed as incurred until the technological feasibility of the related product has been established. After technological feasibility is established, any additional software development costs would be capitalized in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards ("SFAS") No. 86, Capitalization of Software Development Costs. Through December 31, 1997, the Company's process for developing software was essentially completed concurrently with the establishment of technological feasibility, and, accordingly, no software costs have been capitalized to date. Software development costs incurred prior to achieving technological feasibility are charged to research and development expense as incurred. F-7 NVIDIA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Revenue Recognition Revenue from product sales to original equipment manufacturers is recognized after receipt of a signed purchase order and upon shipment, if acceptance of the product is assured and collectibility of the resulting receivable is probable. An allowance for any anticipated returns is recorded at the time of sale. While the Company has not yet sold products through distributors, the Company's policy on sales to distributors will be to defer recognition of sales and related gross profit until the distributors resell the product. Royalty revenue is recognized upon shipment of product by the licensee to its customers. The Company believes that the software sold with its products is incidental to the product as a whole. Research and Development Arrangements The Company enters into contractual agreements to provide design, development and support services on a best efforts basis. All amounts funded to the Company under these agreements are non-refundable once paid. The Company recorded reductions to research and development expense after the services were performed based on the achievement of contractually specified milestones and the collectability of amounts was assured. Accounting for Stock-Based Compensation The Company uses the intrinsic value method to account for its stock-based employee compensation plans. Income Taxes The Company records income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recorded or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Net Income (Loss) Per Share Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period, using either the as-if-converted method for convertible preferred stock or the treasury stock method for options and warrants. The effect of including convertible preferred stock, options and warrants would have been antidilutive during all periods presented and, as a result, such effect has been excluded from the computation of diluted net loss per share. See Note 3 for information regarding potentially dilutive outstanding shares of, and warrants to purchase, convertible preferred stock and outstanding options to purchase common stock. Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and convertible preferred stock issued for nominal consideration and options and warrants granted for nominal consideration prior to the anticipated effective date of the initial public offering (IPO) are included in the calculation of basic and diluted net income (loss) per share, as if they were outstanding for all periods presented. To date, the Company has not had any issuances or grants for nominal consideration. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations for the periods presented: F-8 NVIDIA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PER INCOME SHARES SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1995 Basic and Diluted EPS: Net loss..................................... $(6,377) 11,365 $(0.56) ======= ====== ====== YEAR ENDED DECEMBER 31, 1996 Basic and Diluted EPS: Net loss..................................... $(3,077) 11,383 $(0.27) ======= ====== ====== YEAR ENDED DECEMBER 31, 1997 Basic and Diluted EPS: Net loss..................................... $(2,691) 12,677 $(0.21) ======= ====== ====== THREE MONTHS ENDED MARCH 30, 1998 Basic EPS: Net income................................... $22,108 14,142 $ 0.15 Effect of dilutive securities: Stock options outstanding.................. -- 2,260 (0.02) Convertible................................ -- 9,327 (0.05) ------- ------ ------ Diluted EPS: Net income................................... $22,108 25,729 $ 0.08 ======= ====== ======
Fair Value of Financial Instruments The carrying value of cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. (2) BALANCE SHEET COMPONENTS Certain balance sheet components are as follows: Property and Equipment
DECEMBER 31, ---------------- MARCH 29, 1996 1997 1998 ------- ------- ----------- (UNAUDITED) (IN THOUSANDS) Purchased engineering software............... $ -- $ 3,158 $ 3,313 Test equipment............................... 187 1,467 1,484 Computer equipment........................... 2,209 3,264 5,750 Leasehold improvements....................... 69 74 74 Office furniture and equipment............... 159 259 358 Assets held for lease........................ -- 157 188 ------- ------- ------- 2,624 8,379 11,167 Accumulated depreciation and amortization.... (1,480) (2,843) (3,519) ------- ------- ------- Property and equipment, net................ $ 1,144 $ 5,536 $ 7,648 ======= ======= =======
F-9 NVIDIA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Accrued Liabilities
DECEMBER 31, ------------- MARCH 29, 1996 1997 1998 ------ ------ ----------- (UNAUDITED) (IN THOUSANDS) Advances on development agreement................ $2,500 $2,500 $1,875 Other............................................ 372 745 1,779 ------ ------ ------ $2,872 $3,245 $3,654 ====== ====== ======
(3) STOCKHOLDERS' EQUITY Convertible Preferred Stock In 1993, the Company sold 4,303,000 shares of Series A preferred stock at $0.50 per share, net of $22,000 of issuance costs. In 1994, the Company sold 2,390,831 shares of Series B preferred stock at $1.80 per share, net of $57,000 of issuance costs. In 1995, the Company sold 416,667 shares of Series B preferred stock at $1.80 per share. In 1995, the Company sold 750,000 shares of Series C preferred stock at $6.67 per share, net of $14,000 of issuance costs. On August 19 and September 12, 1997, the Company sold an aggregate of 1,438,812 shares of Series D preferred stock at $5.26 per share, net of $30,000 of issuance costs. The rights, preferences, and privileges of the holders of Series A, B, C and D convertible preferred stock are as follows: . Dividends are noncumulative and payable only upon declaration by the Board of Directors at a rate of $.04, $.144, $.533 and $.42 per share for Series A, B, C and D preferred stock, respectively. . Holders of Series A, B, C and D preferred stock have a liquidation preference of $.50, $1.80, $6.67, and $5.26 per share, respectively, plus any declared but unpaid dividends over holders of common stock. . Each holder of preferred stock has voting rights equal to common stock on an "as-if-converted" basis. . Each share of preferred stock may be converted into common stock at the option of the holder on a one-for-one basis, subject to adjustment to protect against dilution. Automatic conversion will occur upon the earlier of a vote of holders of at least two-thirds of the shares of preferred stock then outstanding or upon the closing of an initial public offering of common stock in which the aggregate proceeds exceed $15,000,000 and the offering price equals or exceeds $10.00 per share. Warrants During the period 1993 through 1997, the Company granted warrants to purchase 80,000; 66,877; 10,000 and 29,706 of Series A, B, C and D preferred stock, respectively, in connection with lease financing and services. These warrants are exercisable at $.50, $1.80, $6.67 and $5.26 for shares of Series A, B, C and D preferred stock, respectively, and expire from 2003 to 2007. At December 31, 1997, warrants to purchase 80,000, 39,100, 10,000 and 29,706 shares of Series A, B, C and D preferred stock, respectively, were outstanding. The fair value of all warrant issuances calculated using the Black-Scholes option pricing model was not material, using the following assumptions: dividend yield - none; expected life - contractual term; risk free interest rates - 6.0% to 6.5%; volatility - 60%. F-10 NVIDIA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Options The Equity Incentive Plan (the "Plan"), as amended and restated on February 17, 1998, provides for the issuance of up to 15,000,000 shares of the Company's common stock to directors, employees and consultants. The Plan provides for the issuance of stock bonuses, restricted stock purchase rights, incentive stock options or nonstatutory stock options. Pursuant to the Plan, the exercise price for incentive stock options is at least 100% of the fair market value on the date of grant or for employees owning in excess of 10% of the voting power of all classes of stock, 110% of the fair market value on the date of grant. For nonstatutory stock options, the exercise price is no less than 85% of the fair market value on the date of grant. Options generally expire in 10 years. Vesting periods are determined by the Board of Directors; however, options generally vest ratably over four years beginning one year after the date of grant. Options may be exercised prior to full vesting. Any unvested shares so purchased are subject to a repurchase right in favor of the Company with the repurchase price to be equal to the original purchase price of the stock. The right to repurchase at the original price shall lapse at a minimum rate of 20% per year over five years from the date the option was granted. As of December 31, 1997, there were 1,942,897 such shares subject to repurchase. The Company accounts for the plan using the intrinsic value method. As such, compensation expense is recorded if on the date of grant the current fair value per share of the underlying stock exceeds the exercise price per share. With respect to certain options granted during 1997, the Company has recorded deferred compensation of $2,100,000 for the difference at the grant date between the exercise price per share and the fair value per share, based upon independent valuations and management's estimate of the fair value of the Company's stock on the various grant dates of the common stock underlying the options. This amount is being amortized on a straight line basis over the vesting period of the individual options, generally four years. Had compensation cost for the Company's stock-based compensation plan been determined consistent with SFAS No. 123, the Company's net loss would have increased and net income would have decreased to the pro forma amounts indicated below:
THREE MONTHS ENDED 1995 1996 1997 MARCH 29, 1998 ------- ------- ------- ------------------ (IN THOUSANDS) (UNAUDITED) Net income (loss): As reported.................... $(6,377) $(3,077) $(2,691) $2,180 Pro forma...................... (6,389) (3,109) (2,796) 2,140 Net income (loss) per share: As reported and pro forma basic net income (loss) per share... $ (.56) $ (.27) $ (.21) $ .15 As reported and pro forma diluted net income (loss) per share......................... (.56) (.27) (.21) .08 Shares used in computing reported and pro forma basic net income (loss) per share... 11,365 11,383 12,677 14,142 Shares used in computing reported and pro forma diluted net income (loss) per share... 11,365 11,383 12,677 25,729
The fair value of each option grant is estimated on the date of grant using the minimum value method with the following weighted-average assumptions: no dividend yield; risk free interest rate of 6.5%; and expected life for the option of five years. F-11 NVIDIA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) A summary of option transactions under the Plan follows:
WEIGHTED NUMBER OF AVERAGE AVAILABLE SHARES UNDER PRICE PER FOR GRANT OPTION SHARE ----------- ------------ --------- Balances, December 31, 1994............ 459,707 143,000 $ .09 Authorized........................... 1,500,000 -- -- Granted.............................. (1,490,375) 1,490,375 .18 Exercised............................ -- (12,500) .18 ----------- ---------- Balances, December 31, 1995............ 469,332 1,620,875 .17 Authorized........................... 4,000,000 -- -- Granted.............................. (1,756,860) 1,756,860 .31 Exercised............................ -- (407,581) .20 Canceled............................. 794,134 (794,134) .19 ----------- ---------- Balances, December 31, 1996............ 3,506,606 2,176,020 .27 Authorized........................... 2,000,000 -- -- Granted.............................. (4,950,857) 4,950,857 1.43 Exercised............................ -- (2,573,211) .32 Canceled............................. 868,208 (868,208) .29 ----------- ---------- Balances, December 31, 1997............ 1,423,957 3,685,458 .28 Authorized (unaudited)............... 4,800,000 -- -- Granted (unaudited).................. (2,327,500) 2,327,500 6.93 Exercised (unaudited)................ -- (1,125) 3.15 Canceled (unaudited)................. 15,000 (15,000) 5.67 ----------- ---------- Balances, March 29, 1998 (unaudited)... 3,911,457 5,996,833 $3.90 =========== ==========
During 1997, the Company granted Common Stock options within the Plan to consultants for services rendered. The fair value of all option grants to non- employees calculated using the Black-Scholes option pricing model was $120,000, using the following assumptions: dividend yield--none; expected life--contractual term; risk free interest rates--6.0% to 6.5%; volatility-- 60%. Options to purchase 50,000 shares of Common Stock were granted to an outside investor during the Series D preferred stock offering. The weighted-average fair value of options granted during 1995, 1996 and 1997 was $.05, $.08 and $.79, respectively. At December 31, 1997, 2,230,458 shares were exercisable. The following table summarizes information about stock options outstanding as of December 31, 1997:
OUTSTANDING --------------------- WEIGHTED- AVERAGE REMAINING NUMBER EXERCISE NUMBER CONTRACTUAL OF SHARES PRICES OF SHARES LIFE EXERCISABLE -------- --------- ----------- ----------- $ .05.................................... 3,000 6.50 3,000 .18.................................... 50,000 7.08 50,000 .36.................................... 1,034,833 9.07 1,034,833 1.30.................................... 796,000 9.70 781,000 2.64.................................... 1,155,500 9.91 345,500 3.15.................................... 696,125 9.98 16,125 --------- ---- --------- $ .05 - $3.15............................ 3,735,458 9.60 2,230,458 ========= =========
F-12 NVIDIA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (4) COMMITMENTS The Company leases a facility in Sunnyvale, California under operating lease agreements that expire in August 1998. The Company is committed to pay approximately $499,000 of future minimum lease payments under this agreement during 1998. Rent expense for 1995, 1996 and 1997 was approximately $325,000, $408,000 and $426,000, respectively. In addition to the facility lease, the Company also leases certain computers and equipment under capital leases with the option to purchase the assets upon termination of the leases. As of December 31, 1997, future minimum lease payments, including costs to exercise buyout options under capital leases, were as follows:
(IN THOUSANDS) Year ending December 31: 1998.......................................................... $1,589 1999.......................................................... 1,442 2000.......................................................... 934 2001.......................................................... 7 ------ Total lease payments........................................ 3,972 Less amount representing interest, at rates ranging from 9% to 12%............................................................ 647 ------ Present value of minimum lease payments......................... 3,325 Less current portion............................................ 1,434 ------ Long-term portion........................................... $1,891 ======
Assets recorded under capital leases included in property and equipment were $2,314,000 and $4,765,000 as of December 31, 1996 and 1997, respectively. Accumulated amortization thereon was $1,233,000 and $2,137,000 as of December 31, 1996 and 1997, respectively. (5) INCOME TAXES The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:
DECEMBER 31, ---------------- 1996 1997 ------- ------- (IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards....................... $ 3,374 $ 3,743 Plant and equipment--depreciation differences.......... 127 173 Advances on development contract....................... 996 996 Research credit carryforwards.......................... 617 1,058 Stock options.......................................... -- 72 Other reserves and accruals............................ 107 229 ------- ------- Total gross deferred tax assets...................... 5,221 6,271 Less valuation allowance............................... (5,221) (6,271) ------- ------- Net deferred tax assets.............................. $ -- $ -- ======= =======
The net increase in the valuation allowance was approximately $1,800,000 and $1,050,000 for the years ended December 31, 1996 and 1997, respectively. The Company believes that sufficient uncertainty exists with F-13 NVIDIA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) respect to future realization of these deferred tax assets; therefore, it has established a valuation allowance against all net deferred tax assets. The Company has net operating loss carryforwards for federal income tax return purposes of approximately $10,000,000, which can be used to reduce future taxable income. These carryforwards expire in 2008 through 2012. As of December 31, 1997, the Company had California operating loss carryforwards of approximately $5,000,000 available to offset future income subject to California franchise tax. The difference between the federal loss carryforwards and the California loss carryforwards results primarily from a 50% limitation on California loss carryforwards, and certain research and development costs that were deferred for California tax purposes. The California net operating loss carryforwards expire in various amounts from 1998 through 2002. The Company also has federal and California tax credit carryforwards of approximately $600,000 and $450,000, respectively, as of December 31, 1997. These tax credits expire through 2012. Under the Tax Reform Act of 1986, the amounts of any benefit from net operating losses and credits that can be carried forward may be limited in the event of an ownership change as defined in the Internal Revenue Code, Section 382. (6) DEVELOPMENT AGREEMENTS The Company has a strategic collaboration agreement with ST Microelectronics, Inc. ("ST") for the manufacture, marketing, and sale of certain of the Company's products. In 1996, ST paid the Company $2,500,000 for advanced royalty payments and agreed to partially support the research and development and marketing efforts for certain of the Company's products. In connection with this agreement the Company recorded royalty income of $79,000, $202,000 and $1,791,000 in 1995, 1996 and 1997, respectively; a reduction to research and development cost of $1,580,000 and $1,936,000 in 1996 and 1997, respectively, and a reduction to sales, general and administrative expense of $495,000 and $420,000 in 1996 and 1997, respectively. In January of 1998, ST agreed to forgive the $2,500,000 in advanced royalty payments in exchange for the Company's obligation to provide ST continued development and support on certain products developed through the end of 1998. Accordingly, $2,500,000 is included in accrued liabilities at December 31, 1996 and 1997. In May 1995, the Company entered into a five year strategic alliance agreement (the "Agreement") with a third party to develop a product, the NV2, using the Company's technology with the purpose of incorporating the NV2 into such third party's products. The third party made nonrefundable payments to the Company to develop the NV2. The Company recorded a reduction to research and development of $2,000,000 in 1995 and $3,000,000 in 1996. As part of this agreement, the third party also purchased in July 1995, 750,000 shares of Series C convertible preferred stock for $5,000,000. The third party revised its product development plans, and the Company terminated the development of this particular technology in 1996. The costs incurred under the development agreements approximated the amounts recorded as reduction to expenses. (7) RISK AND UNCERTAINTIES Product Concentration. The Company designs, develops and markets 3D graphics processors for the mainstream PC market. Substantially all of the Company's revenue from product sales in 1997 was derived from sales of one product, the RIVA128 graphics processor. Since the Company has no other product line, the Company's business, financial condition and results of operations would be materially adversely affected if for any reason its current or future 3D graphics processors do not achieve widespread acceptance in the mainstream PC market. F-14 NVIDIA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Customer Concentration. The Company has only a limited number of customers and its sales are highly concentrated. The Company primarily sells its products to add-in board manufacturers, which incorporate graphics products in the boards they sell to PC OEMs. Product revenue from STB Systems, Inc. ("STB") and Diamond Multimedia Systems, Inc. ("Diamond") accounted for 63% and 31%, respectively, of the Company's 1997 revenue and in 1996 and 1995 Diamond accounted for 82% and 86%, respectively, of revenue. Sales to add-in board manufacturers are primarily dependent on achieving design wins with leading PC OEMs, and the Company believes that the large majority of its 1997 revenue was attributable to products that ultimately were incorporated into PCs sold by Compaq, Dell, Gateway, Micron and Packard Bell NEC. As a result, the Company's business, financial condition and results of operations could be materially adversely affected by the decision of a single PC OEM or add-in board manufacturer to cease using the Company's products or by a decline in the number of PCs or boards sold by a single PC OEM or add-in board manufacturers or by a small number of customers. Accounts receivable as of December 31, 1997 were $6,261,000 and $5,768,000 from STB and Diamond, respectively. Markets. In 1997, the Company derived all of its revenue from the sale or license of products for use in PCs. The PC market is characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and significant price competition, resulting in short product life cycles and regular reductions in average selling prices over the life of a specific product. In addition, the Company's success will depend in part upon the emerging mainstream PC 3D graphics market. This market has only recently begun to emerge and is dependent on future development of a substantial customer and computer manufacturer demand for 3D graphics functionality. If the market for mainstream PC 3D graphics fails to develop or develops more slowly than expected, the Company's business, financial condition and results of operations could be materially adversely affected. Intellectual Property. The Company relies primarily on a combination of patent, mask work protection, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements to protect its intellectual property. Vigorous protection and pursuit of intellectual property rights or positions characterize the semiconductor industry, which in turn has resulted in significant and often protracted and expensive litigation. The 3D graphics market in particular has been characterized recently by the aggressive pursuit of intellectual property positions. Infringement claims by third parties or claims for indemnification by customers or end users of the Company's products resulting from infringement claims could be asserted in the future and such assertions, of proven to be true, could materially adversely affect the Company's business, financial condition and results of operations. Any limitations on the Company's ability to market its products, or delays and costs associated with redesigning its products or payments of license fees to third parties, or any failure by the Company to develop or license a substitute technology on commercially reasonable terms, could have a material adverse effect on the Company's business, financial condition and results of operations. (8) SUBSEQUENT EVENTS Reincorporation On April 16, 1998, the Company was reincorporated in the state of Delaware. The Certificate of Incorporation of the Delaware corporation authorizes 200,000,000 shares of common stock, $.001 par value per share, and 10,000,000 shares of preferred stock, $.001 par value per share. The accompanying financial statements have been retroactively restated to give effect to the reincorporation. Employee Stock Purchase Plan. In February 1998, the Board approved the 1998 Employee Stock Purchase Plan (the "Purchase Plan"), covering an aggregate of 500,000 shares of Common Stock. The Purchase Plan is intended to qualify as an F-15 NVIDIA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) "employee stock purchase plan" within the meaning of Section 423 of the Code. Under the Purchase Plan, the Board may authorize participation by eligible employees, including officers, in periodic offerings following the adoption of the Purchase Plan. The offering period for any offering will be no longer than 27 months. Employees are eligible to participate if they are employed by the Company or an affiliate of the Company designated by the Board. Employees who participate in an offering generally can have up to 10% of their earnings withheld pursuant to the Purchase Plan and applied, on specified dates determined by the Board, to the purchase of shares of Common Stock. The Board may increase this percentage in its discretion, up to 15%. The price of Common Stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the Common Stock on the commencement date of each offering period or the relevant purchase date. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with the Company. Non-Employee Directors' Stock Option Plan In February 1998, the Board adopted the 1998 Non-Employee Directors' Stock Option Plan (the "Directors' Plan") to provide for the automatic grant of options to purchase shares of Common Stock to non-employee directors of the Company who are not employees of or consultants to the Company or an affiliate of the Company (a "Non-Employee Director"). The Compensation Committee administers the Directors' Plan. The aggregate number of shares of Common Stock that may be issued pursuant to options granted under the Directors' Plan is 300,000 shares. LEGAL PROCEEDINGS Silicon Graphics, Inc. ("SGI") filed a patent infringement lawsuit against the Company in April 1998, and in May 1998, S3 Incorporated ("S3") filed a patent infringement lawsuit against the Company. In the event of an adverse result in either the SGI or the S3 suit, the Company could be required to do one or more of the following: pay substantial damages (including treble damages), cease the manufacture, use and sale of any infringing products, expend significant resources to develop non-infringing technology, or obtain a license from SGI or S3 for any infringing technology. Either suit could result in limitations on the Company's ability to market its products, delays and costs associated with redesigning its products or payments of license fees or other payments to SGI or S3, any of which would have a material adverse effect on the Company's business, financial condition and results of operations. F-16 INSIDE BACK COVER [Description of illustrations: Depiction of a bee on a computer screen in the following phases of graphic rendering--wire frame, Gouraud shading, texture mapping and bump mapping with lighting and reflections.] [LOGO OF NVIDIA] PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses, other than the underwriting discounts and commissions, payable by the Registrant in connection with the sale of the shares of Common Stock being registered. All the amounts shown are estimates except for the SEC registration fee, the NASD filing fee and the Nasdaq National Market application fee. SEC Registration fee.......................................... $ 11,800 NASD filing fee............................................... 4,500 Nasdaq National Market listing fee............................ 95,000 Blue sky qualification fees and expenses...................... 5,000 Printing and engraving expenses............................... 150,000 Legal fees and expenses....................................... 400,000 Accounting fees and expenses.................................. 175,000 Transfer agent and registrar fees............................. 10,000 Miscellaneous................................................. 298,700 ---------- Total..................................................... $1,150,000 ==========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. As permitted by Section 145 of the Delaware General Corporation Law, the Bylaws of the Company provide that (i) the Company is required to indemnify its directors and executive officers to the fullest extent permitted by the Delaware General Corporation Law, (ii) the Company may, in its discretion, indemnify other officers, employees and agents as set forth in the Delaware General Corporation Law, (iii) to the fullest extent not prohibited by the Delaware General Corporation Law, the Company is required to advance all expenses incurred by its directors and executive officers in connection with a legal proceeding (subject to certain exceptions), (iv) the rights conferred in the Bylaws are not exclusive, (v) the Company is authorized to enter into indemnification agreements with its directors, officers, employees and agents and (vi) the Company may not retroactively amend the Bylaws provisions relating to indemnity. The Company has entered into agreements with its directors and executive officers that require the Company to indemnify such persons against expenses, judgments, fines, settlements and other amounts that such person becomes legally obligated to pay (including expenses of a derivative action) in connection with any proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact that such person is or was a director or officer of the Company or any of its affiliated enterprises, provided such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Company. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder. The Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the Underwriters of the Registrant and its officers and directors for certain liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"), or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since July 1, 1995, the Registrant has sold and issued the following unregistered securities: (1) In July 1995, the Company sold 750,000 shares of the Company's Series C Preferred Stock for an aggregate purchase price of $5,000,000. II-1 (2) In October 1995, the Company issued, in connection with an equipment lease, a warrant to purchase 5,400 shares of Series C Preferred Stock at an exercise price of $6.67 per share. (3) In October 1996, the Company issued, in connection with equipment leases, a warrant to purchase 200 shares of Series B Preferred Stock at an exercise price of $1.80 per share and a warrant to purchase 4,600 shares of Series C Preferred Stock at an exercise price of $6.67. (4) In August and September 1997, the Company sold an aggregate of 1,438,812 shares of Series D Preferred Stock to certain investors for an aggregate purchase price of $7,568,151. (5) In August 1997, the Company issued, in connection with an equipment lease, a warrant to purchase 7,843 shares of Series D Preferred Stock at an exercise price of $5.26 per share. (6) In October 1997, the Company issued, in connection with an equipment leases, warrants to purchase an aggregate of 21,863 shares of Series D Preferred Stock at an exercise price of $5.26 per share. (7) In October 1997, the Company issued an option to purchase 50,000 shares of Common Stock at an exercise price of $2.64 per share. (8) From July 1, 1995 to July 21, 1998, the Company granted stock options to employees, directors and consultants covering an aggregate of 10,721,860 shares of the Company's Common Stock, at exercise prices varying from $0.18 to $9.00. Of such shares, 3,016,810 shares have been issued and sold pursuant to the exercise of such options. Options to purchase 1,960,717 shares of Common Stock have been canceled or have lapsed without being exercised or otherwise been canceled. Stock awards for an aggregate of 17,932 shares were issued at purchase prices varying from $0.18 to $0.36. The Company claimed exemptions under the Securities Act from registration under the Securities Act for the sale and issuance of securities in the transaction described in paragraphs (1) through (7) by virtue of Section 4(2) or Regulation D promulgated thereunder as transactions not involving public offering. The purchasers in each case represented their intention to acquire the securities for investment only and not with a view to the distribution thereof. Appropriate legends are affixed to the stock certificates issued in such transactions. All recipients either received adequate information about the Registrant or had access, through employment or other relationships, to such information. The sales and issuances in the transactions described in paragraph (8) above were deemed to be exempt from registration under the Securities Act by virtue of Rule 701 promulgated thereunder, in that they were issued pursuant to a written compensatory benefit plan, as provided by Rule 701. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) EXHIBITS.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 1.1* Form of Underwriting Agreement. 3.1+ Certificate of Incorporation of the Company. 3.2+ Bylaws of the Company. 3.3+ Form of Amended and Restated Certificate of Incorporation to be filed upon completion of this offering. 4.1+ Reference is made to Exhibits 3.1 and 3.2. 4.2+ Specimen Stock Certificate. 4.3+ Second Amended and Restated Investors' Rights Agreement, dated August 19, 1997 between the Company and the parties indicated thereto. 5.1* Opinion of Cooley Godward llp. 10.1+ Form of Indemnity Agreement between Registrant and each of its directors and officers. 10.2+ 1998 Equity Incentive Plan. 10.3+ Form of Incentive Stock Option Agreement under the 1998 Equity Incentive Plan.
II-2
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.4+ Form of Nonstatutory Stock Option Agreement under the 1998 Equity Incentive Plan. 10.5+ 1998 Employee Stock Purchase Plan. 10.6+ Form of Employee Stock Purchase Plan Offering. 10.7+ 1998 Non-Employee Directors' Stock Option Plan. 10.8+ Form of Nonstatutory Stock Option Agreement under the 1998 Non- Employee Directors' Stock Option Plan (Initial Grant). 10.9+ Form of Nonstatutory Stock Option Agreement under the 1998 Non- Employee Directors' Stock Option Plan (Annual Grant). 10.10+** Strategic Collaboration Agreement dated November 10, 1993 between the Company and ST Microelectronics, Inc., as amended on June 3, 1996 and January 27, 1998. 10.11+ Sublease Agreement, dated February 16, 1995, between Amdahl Corporation and the Company, as amended on March 1, 1995 and September 1, 1995. 10.12+ Form of Nonstatutory Stock Option Agreement under the 1998 Non- Employee Directors' Stock Option Plan (Committee Grant). 10.13 Sublease dated April 2, 1998 between Apple Computer, Inc. and the Company. 23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors. 23.2* Consent of Cooley Godward llp (reference is made to Exhibit 5.1). 24.1+ Power of Attorney. 27.1+ Financial Data Schedule.
- -------- *To be filed by amendment. +Previously filed **Confidential treatment has been requested for portions of this document. The information omitted pursuant to such request has been filed separately with the Securities and Exchange Commission. (b) FINANCIAL STATEMENT SCHEDULES. Schedules not listed above are omitted because they are not required, they are not applicable or the information is already included in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 The undersigned Registrant hereby undertakes that: (1) for purposes of determining any liability under the Act, the information omitted from the form of prospectus as filed as part of the registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of the registration statement as of the time it was declared effective, (2) for the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and this offering of such securities at that time shall be deemed to be the initial bona fide offering thereof, and (3) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-4 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SUNNYVALE, STATE OF CALIFORNIA, ON THE 24TH DAY OF JULY 1998. NVIDIA Corporation Jen-Hsun Huang* By: _________________________________ Jen-Hsun Huang President, Chief Executive Officer and Director PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- Jen-Hsun Huang* President, Chief Executive July 24, 1998 ____________________________________ Officer and Director Jen-Hsun Huang (Principal Executive Officer) /s/ Geoffrey G. Ribar Chief Financial Officer July 24, 1998 ____________________________________ (Principal Financial and Geoffrey G. Ribar Accounting Officer) Tench Coxe* Director July 24, 1998 ____________________________________ Tench Coxe Harvey C. Jones, Jr.* Director July 24, 1998 ____________________________________ Harvey C. Jones, Jr. William J. Miller* Director July 24, 1998 ____________________________________ William J. Miller A. Brooke Seawell* Director July 24, 1998 ____________________________________ A. Brooke Seawell Mark A. Stevens* Director July 24, 1998 ____________________________________ Mark A. Stevens /s/ Geoffrey G. Ribar *By: _______________________________ Geoffrey G. Ribar As Attorney-In-Fact
II-5 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 1.1* Form of Underwriting Agreement. 3.1+ Certificate of Incorporation of the Company. 3.2+ Bylaws of the Company. 3.3+ Form of Amended and Restated Certificate of Incorporation to be filed upon completion of this offering. 4.1+ Reference is made to Exhibits 3.1 and 3.2. 4.2+ Specimen Stock Certificate. 4.3+ Second Amended and Restated Investors' Rights Agreement, dated August 19, 1997 between the Company and the parties indicated thereto. 5.1* Opinion of Cooley Godward llp. 10.1+ Form of Indemnity Agreement between Registrant and each of its directors and officers. 10.2+ 1998 Equity Incentive Plan. 10.3+ Form of Incentive Stock Option Agreement under the 1998 Equity Incentive Plan. 10.4+ Form of Nonstatutory Stock Option Agreement under the 1998 Equity Incentive Plan. 10.5+ 1998 Employee Stock Purchase Plan. 10.6+ Form of Employee Stock Purchase Plan Offering. 10.7+ 1998 Non-Employee Directors' Stock Option Plan. 10.8+ Form of Nonstatutory Stock Option Agreement under the 1998 Non- Employee Directors' Stock Option Plan (Initial Grant). 10.9+ Form of Nonstatutory Stock Option Agreement under the 1998 Non- Employee Directors' Stock Option Plan (Annual Grant). 10.10+** Strategic Collaboration Agreement dated November 10, 1993 between the Company and ST Microelectronics, Inc., as amended on June 3, 1996 and January 27, 1998. 10.11+ Sublease Agreement, dated February 16, 1995, between Amdahl Corporation and the Company, as amended on March 1, 1995 and September 1, 1995. 10.12+ Form of Nonstatutory Stock Option Agreement under the 1998 Non- Employee Directors' Stock Option Plan (Committee Grant). 10.13 Sublease dated April 2, 1998 between Apple Computer, Inc. and the Company. 23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors. 23.2* Consent of Cooley Godward llp (reference is made to Exhibit 5.1). 24.1+ Power of Attorney. 27.1+ Financial Data Schedule.
- -------- *To be filed by amendment. +Previously filed **Confidential treatment has been requested for portions of this document. The information omitted pursuant to such request has been filed separately with the Securities and Exchange Commission. EX-10.13 2 SUBLEASE AGREEMENT WITH APPLE COMPUTER EXHIBIT 10.13 SUBLEASE This Sublease, dated April 2, 1998, for reference purposes only, is made by and between Apple Computer, Inc., a California corporation (the "Sublessor"), and NVidia, a Delaware corporation, (the "Sublessee"), with respect to the following facts: A. Sublessor is the tenant under that certain Lease (the "Master Lease") dated June 1, 1988, amended by that certain Memorandum of Lease dated June 1, 1988, First Amendment to Lease dated May 31, 1989, that certain Second Amendment to Lease dated November 9, 1989, that certain Third Amendment to Lease dated February 8, 1995, that certain Fourth Amendment to Lease dated March 29, 1995, that certain Fifth Amendment to Lease dated June 20, 1995, and that certain Sixth Amendment to Lease dated December 22, 1995, of approximately 218,816 square feet of space located at 3515, 3535 and 3585 Monroe Drive, Santa Clara, Santa Clara County, State of California (the "Premises"), which Master Lease was executed by MPJ, a California general partnership, as Landlord (hereinafter the "Master Lessor"), and Sublessor as Tenant. The Master Lease is attached hereto as Exhibit A and, subject to the terms hereof, is incorporated herein. B. Sublessee desires to sublease a portion of the Premises, consisting of approximately eighty-eight thousand nine hundred thirty-six (88,936) square feet, commonly known as 3535 Monroe Drive, Santa Clara, California, and shown hatched on the floor plan attached as Exhibit B (the "Sublease Premises"), on the terms and conditions set forth below. NOW, THEREFORE, for good and valuable consideration, the parties agree as follows: 1. Premises Sublessor hereby subleases the Sublease Premises to -------- Sublessee, and Sublessee hereby subleases the Sublease Premises from Sublessor, for the term, at the rental and upon all the conditions set forth herein. 2. Term. ---- 2.1 Term. The term of this Sublease shall be for a period commencing ---- on the later of (a) June 1, 1998 or (b) the date that the written consent of Master Lessor to this Sublease has been obtained (the "Commencement Date"). Subject to the terms hereof, this Sublease shall expire on December 31, 2002, unless the Master Lease is sooner terminated, which termination shall occur without liability on the part of Sublessor unless such termination resulted solely from a default of Sublessor thereunder. 2.2 Delay in Commencement. Notwithstanding the provisions of --------------------- paragraph 2.1, above, if for any reason Sublessor cannot deliver possession of the Demised Premises to Sublessee on the Commencement Date, Sublessor shall not be subject to any liability on account of said failure to deliver, nor shall such failure affect the validity of this Sublease or the obligations of Sublessee hereunder or extend the term hereof, but in such event, Sublessee shall not be obligated to pay rent for the Sublease Premises until possession of the Sublease Premises is tendered to Sublessee, provided the delay is not attributable to Sublessee. If the Commencement Date is delayed as a result of any act or omission of Sublessee, its agents, employees or contractors, the Commencement Date shall be deemed to be the date the Commencement Date would have occurred if no Sublessee delay or delays had occurred. Notwithstanding the provisions of paragraph 2.2, if Sublessor has not delivered the Sublease Premises to Sublessee in the condition required hereunder, free of occupants and tenants, on or before July 1, 1998, Sublessee shall have the right thereafter, until such possession is 1. delivered to Sublessee to cancel this Sublease on not less than ten (10) days prior written notice to Sublessor; if Sublessor delivers the Premises to Sublessee within period, Sublessee shall accept possession of the Premises. Upon such cancellation, Sublessor shall return to Sublessee all sums theretofore deposited by Sublessee with Sublessor and neither party shall have any further liability or obligation to the other. 3. Rent. ---- 3.1 Base Monthly Rent. Beginning on the Commencement Date, ----------------- Sublessee shall pay to Sublessor during the term of this Sublease the following amounts as "Base Monthly Rent": Months Rent/SF/Mo Rent/Mo ------ ---------- -------- Months 1 through 12 $1.25 NNN $111,170 Months 13 through 24 $1.70 NNN $151,191 Months 25 through 36 $1.75 NNN $155,638 Months 37 through 48 $1.80 NNN $160,085 Months 49 through 55 $1.85 NNN $164,532 Full Base Monthly Rent is due and shall be paid in advance in equal installments on or before the first day of each calendar month in lawful money of the United States without notice or demand and without any set off, deduction, abatement or offset whatsoever except as otherwise provided herein. Base Monthly Rent for any partial month during the Sublease term shall be prorated based on the actual number of days in the partial month. Sublessor and Sublessee agree to execute a Confirmation of Commencement Date Agreement in the form attached as Exhibit C, confirming the date this Sublease commences and the dates on which Base Monthly Rent increases during the Sublease term. 3.2 Payment of First Month's Base Monthly Rent. Concurrently ------------------------------------------ with Sublessee's execution of this Sublease, Sublessee shall deposit with Sublessor the sum of One Hundred Eleven Thousand One Hundred Seventy and 00/100 Dollars ($111,170.00) as payment of the first month's Base Monthly Rent. 3.3 Additional Rent. All monies other than Base Monthly Rent ---------------- required to be paid by Sublessee under this Sublease, including, without limitation, the furniture price (as defined in paragraph 14 and Exhibit F), all operating expenses, taxes, insurance, maintenance and other expenses and charges of every kind and nature arising in connection with the Sublease Premises, this Sublease or the Master Lease (including, without limitation, all amounts payable under the Master Lease as described in Sections 3.4, 4, 6, 7, and 11) shall be deemed "Additional Rent" payable by Sublessee to Sublessor in accordance with the terms of this Sublease and the Master Lease. Base Monthly Rent and Additional Rent shall be referred to collectively herein as "Rent." For purposes of this Sublease, Sublessee's Pro Rata Share, as defined in Section 3.4 of the Master Lease, shall be 88,936/275,264 or 32.31%. Rent shall be paid by Sublessee to Sublessor at the address stated herein or at such other address as may be designated by Sublessor. Notwithstanding the foregoing, Sublessor shall have the right to direct Sublessee to pay Rent directly to Master Lessor, and Master Lessor shall credit such amounts to the Rent due for the Sublease Premises pursuant to the Master Lease. 3.4 No Rental Adjustment. The parties agree that any statement -------------------- of square footage set forth in the Sublease is an approximation which Sublessor and Sublessee agree is reasonable and the rental based thereon and Tenant's Pro Rata Share as set forth in paragraph 3.3. is not subject to revisions if the actual square footage is more or less. Sublessor agrees to make timely payments of rent and any other sums due 2. thereunder and to faithfully and fully perform all of its obligations under the Master Lease to the end that the Master Lease shall not be terminated to the default of Sublessor thereunder. Notwithstanding anything herein to the contrary, Sublessor shall promptly provide Sublessee with a copy of any written notice received by Sublessor of any default of Sublessor under the Master Lease, which default is continuing after the expiration of any applicable grace period provided therefor in the Master Lease ("Sublessor's Default"). From and after Sublessor's Default, Sublessee shall have the right, but not the obligation, to pay any and all Base Rent and Additional Rent accruing from and after the date of such Default, and perform all its obligations hereunder to Master Lessor without being liable to Lessor for such payments or performance. If Master Lease terminates due to Sublessor's default of its obligations thereunder, Sublessee may request Master Lessor to execute and deliver to Sublessee a nondisturbance agreement. Upon receipt thereof, Sublessee shall attorn to Master Lessor and recognize Master Lessor as Lessor under this Lease, and Master Lessor shall agree in writing to be bound by the terms of this Sublease. 4. Security Deposit. ---------------- 4.1 Concurrently with Sublessee's execution of this Sublease, Sublessee shall deposit with Sublessor the sum of Two Hundred Twenty-Two Thousand Three Hundred Forty and 00/100 Dollars ($222,340.00) which shall be held by Sublessor as security for the faithful performance of all of the terms of this Sublease. If Sublessee fails to pay Rent or otherwise defaults with respect to any provision of this Sublease, then Sublessor may draw upon, use, apply or retain all or any portion of the security deposit after applicable notice and cure periods for the payment of any Rent or other charge in default, for the payment of any other sum which Sublessor has become obligated to pay by reason of Sublessess's default, or to compensate Sublessor for any loss or damage which Sublessor has suffered thereby. If Sublessor so uses or applies all or any portion of the security deposit, then Sublessee, within fifteen (15) days after demand therefore, shall deposit cash with Sublessor in the amount required to restore to the full amount stated above. Upon the expiration of this Sublease, if Sublessee is not in default, Sublessor shall return to Sublessee so much of the security deposit as has not been applied by Sublessor pursuant to this Paragraph 4, or which is not otherwise required to cure Sublessee's defaults. 5. Use of Premises. The Demised Premises shall be used and occupied --------------- solely for the purposes set forth in Section 5.1 of the Master Lease. 5.1. Condition of Demised Premises; Repairs. Subject to the -------------------------------------- provisions of Paragraph 5.2 below, Sublessor has not agreed to make any alterations, repairs or improvements to the Sublease Premises, and by taking possession of the Sublease Premises, Sublessee shall conclusively be deemed to have accepted the Sublease Premises in their "as-is" then existing condition excluding latent defects, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing or regulating the use or occupancy of the Sublease Premises. Sublessee acknowledges that neither Sublessor nor its agents has made any representations or warranties with respect to the condition of the Sublease Premises or as to the suitability of the Sublease Premises for the conduct of Sublessee's business. In particular, Sublessor makes no representation with respect to compliance of the Sublease Premises or the Complex with the Americans With Disabilities Act of 1990 ("ADA"), compliance with which shall be the sole responsibility of Sublessee. 5.2 Repairs. Sublessor shall have no obligation whatsoever to make ------- or pay the cost of any alterations, improvements or repairs to the Sublease Premises, including, without limitation, any improvement or repair required to comply with any law, regulation, building code or ordinance (including the ADA). Notwithstanding the foregoing, if Master Lessor shall fail to perform its obligations in accordance with the terms of the Master Lease, Sublessor, upon receipt 3. of written notice from Sublessee, shall diligently attempt to enforce all obligations of Master Lessor under the Master Lease (without requiring Sublessor to spend more than a nominal sum, which nominal sum shall be limited to all costs associated with the preparation of and transmittal to Master Lessor of documentation from Sublessor or Sublessor's attorneys detailing the obligations to be performed by Master Lessor under the Master Lease). If, after receipt of written request from Sublessee, Sublessor shall fail or refuse to take action for the enforcement of Sublessor's rights against Master Lessor with respect to the Sublease Premises ("Action"), and provided that Sublessor as Tenant under the Master Lease shall be conferred upon and assigned to Sublessee, and Sublessee shall be subrogated to such rights to the extent that the same shall apply to the Sublease Premises. If any such Action against Master Lessor in Sublessee's name shall be barred by reason of lack of privity, nonassignability or otherwise, Sublessee may take such Action in Sublessor's name; provided that Sublessee has obtained the prior written consent of Sublessor, which consent shall not be unreasonably withheld, and, provided further, that Sublessee shall indemnify, protect, defend by counsel reasonably satisfactory to Sublessor and hold Sublessor harmless from and against any and all liability, loss, claims, demands, suits, penalties or damage (including, without being limited to, reasonable attorneys' fees and expenses) which Sublessor may incur or suffer by reason of such Action, except for any such liability, loss, claims, demands, suits, penalties or damage which Sublessor may incur or suffer by reason of Sublessor's negligent acts or omissions. 5.3 Alterations. Sublessee's rights to make alterations to the ----------- Sublease Premises is subject to the provisions of Section 7.3 of the Master Lease. Unless otherwise agreed to in writing by Master Lessor, at the expiration or earlier termination of this Sublease, Sublessee shall (i) remove all alterations, additions and improvements to the Sublease Premises made by Sublessee or its contractors, (ii) restore the Sublease Premises to their original condition prior to making such alterations, additions and improvements, and (iii) repair all damage caused in removing such alterations, additions and improvements. Sublessee agrees that the indemnification provisions of Section 10 of the Master Lease shall be deemed to include all claims, damages, costs, expenses and the like therein described which arise out of any alterations, additions or other improvements to the Sublease Premises made by Sublessee or its contractors. 6. Master Lease Provisions. ----------------------- 6.1 Performance of Master Lease Provisions. Sublessee acknowledges -------------------------------------- and agrees that this Sublease shall be subject and subordinate to the Master Lease, and neither Sublessee nor Sublessor shall not cause or permit any violation of any term thereof. Sublessee hereby expressly assumes and agrees to perform and comply with, for the benefit of Sublessor and Master Lessor, each and every obligation of Sublessor as Tenant under the Master Lease which relates to the Demised Premises to the extent incorporated herein. Sublessor agrees that it shall perform all of its obligations under the Master Lease which have not been assumed by Sublessee, such that the Master Lease shall not be terminated due to the default of Sublessor during the term of this Sublease. Sublessor shall indemnify, defend, and hold Sublessee harmless from and against any liability, less, damages, actions, proceedings or expenses (including but not limited to attorney's fees and consultant's fees) arising or resulting from or in connection with a breach of this obligation. 6.2 Incorporation By Reference. The terms and conditions of this -------------------------- Sublease shall include all of the provisions of the Master Lease, which are incorporated into this Sublease as if fully set forth, except that: (i) each reference in such incorporated Sections to "Lease" shall be deemed a reference to "Sublease." (ii) each reference to "Landlord" and "Tenant" shall be deemed 4. a reference to "Sublessor" and "Sublessee," respectively, except as otherwise provided herein. (iii) with respect to work, services, repairs, provision of insurance, restoration, or the performance of any other obligation of Master Lessor under the Master Lease including, without limitation, Section 7.1 (Maintenance and Repairs); Section 7.2G and Section 7.3D (Capital Improvements); Section 10.1 (Landlord's Indemnification); Section 11.2 (Landlord's Insurance); Section 12 (Damage or Destruction); Section 13 (Condemnation); Section 18.1 (Outside Area); and Section 18.2 (Outside Area Expenses); the sole obligation of Sublessor shall be as set forth in paragraph 5.2 above. Sublessor shall provide to Sublessee copies of all notices given to Sublessor by Master Lessor which are relevant to this Sublease promptly following receipt thereof, including but not limited to any notice of Sublessor's default or breach of its obligations under the Master Lease. (iv) except as expressly provided herein, with respect to any obligation of Sublessee to be performed under this Sublease, wherever the Master Lease grants to Sublessee a specified number of days to perform its obligations under the Master Lease, Sublessee shall have one-half of the number of days granted in the Master Lease (rounded up) to perform the obligation, including, without limitation, curing any defaults. In addition, the reference in Section 4.1(b) to ten days shall be twenty (20) days; the reference in Section 4.2(b) to ten (10) days shall be twenty (20) days; the reference in Section 4.4 to ten (10) days shall be twenty (20) days; the reference in Section 7.3A to five (5) days shall be ten (10) days, the reference to thirty (30) days shall be forty- five (45) days, the reference to one hundred twenty (120) days shall be one hundred thirty-five (135) days, and the reference to ten (10 business days shall be twenty (20) business days; the reference in Section 9 to ten (10 business days shall be twenty (20) business days; the references in Section 14.1B and 14.1C to fifteen (15) days shall be thirty (30) days; and the references in Section 16.3 to thirty (30) days shall be forty-five (45) days. (v) with respect to any approval required to be obtained from the "Landlord" under the Master Lease, such consent must be obtained from both Master Lessor and Sublessor and the approval of Sublessor may be withheld if Master Lessor's consent is not obtained. (vi) the following provisions are not incorporated into this Sublease, or are incorporated as modified herein: Sections 1, 2, 3.1, 3.2, 3.3; the last full paragraph of Section 3.4; the second paragraph of Section 5.1; the second sentence of Section 7.2F; the proviso in the first sentence of Section 7.3A; the reference to "Landlord" in the first sentence of Section 6.3 shall apply only to the Master Lessor; the word "negligence" in the last sentence of Section 10.2 is replaced with the phrase "gross negligence;" the termination rights of Tenant set forth in Section 12 shall apply only with respect to the Sublease Premises; the proviso in the first sentence of Section 15.1; the reference to "one percent (1%)" in Section 16.2B shall be "five percent (5%);" Section 17; the first sentence of the second paragraph of Section 18.1; the reference to "Landlord" in the third sentence of Section 18.2 shall apply only to the Master Lessor; Section 19; the fourth sentence in Section 20.3C; the proviso in the second sentence of Section 20.11; the addresses set forth in Section 20.16 are replaced with the addresses set forth below in Paragraph 13.4 of this Sublease; Section 20.18; Section 21; Sections 22B through 22F; Exhibits A and B; and all amendments to the Master Lease described in Recital A above. 7. Right to Cure. If Sublessee fails to pay any sum of money to Sublessor ------------- or to Master Lessor, or fails, within any applicable grace periods provided for therein, or to perform any other act on its part to be performed hereunder, then Sublessor may, but shall not be obligated to make such payment or perform such act. All such sums paid and all costs and expenses of performing any such act shall be deemed additional rent payable by Sublessee to Sublessor upon demand, together with interest thereon at the interest rate described in Section 20.14 of the Master Lease. 5. 8. Insurance, Sublessee agrees to carry the insurance coverage described --------- in Section 11.1 of the Master Lease during the term of this Sublease. Sublessee shall name Sublessor as an additional insured under the required insurance policies. Prior to occupancy of the Sublease Premises, Sublessee shall deliver a certificate of insurance evidencing the above to Sublessor and Master Lessor. 9. Assignment and Subletting. ------------------------- 9.1 Restriction on Assignment and Subletting. Sublessee shall not ---------------------------------------- assign, sublease, transfer or encumber this Sublease or any interest therein or grant any license, concession or other right of occupancy of the Sublease Premises or any portion thereof or otherwise permit the use of the Sublease Premises or any portion thereof by any party other than Sublessee (any of which events is hereinafter called a "Transfer") without the prior written consent of the Master Lessor pursuant to Section 14 of the Master Lease and the Sublessor, which consent of Sublessor shall not be unreasonably withheld or delayed. Sublessor's consent shall be considered reasonably withheld if (i) the proposed transferee is determined by Sublessor to not be financially sound applying generally accepted accounting principles in making such determination; (ii) Sublessee is in default; or (iii) any portion of the Sublease Premises would become subject to additional or different governmental laws or regulations as a consequence of the proposed Transfer and/or the proposed transferee's use and occupancy of the Sublease Premises and or which impose significant financial burden on Sublessor as a result thereof. Sublessee acknowledges that the foregoing is not intended to be an exclusive list of the reasons for which Sublessor may reasonably withhold its consent to a proposed Transfer. Any attempted Transfer in violation of the terms of this Paragraph 9 shall, at Sublessor's option, be void. Consent by Sublessor to one or more Transfers shall not operate as a waiver of Sublessor's rights as to any subsequent Transfers. Notwithstanding the foregoing, Sublessee shall be permitted the rights of assignment or subletting described in Section 14.1E of the Master Lease provided that (i) Sublessee gives written notice to Sublessor at least thirty (30) days prior to such proposed transfer together with such information as shall establish that the proposed Transfer qualifies for the exemption set forth in Section 14.1E; (ii) the proposed transferee delivers to Sublessor concurrent with any such assignment or subletting an assumption agreement whereby the proposed transferee assumes and agrees to perform, observe and abide by the terms, conditions, obligations and provisions of the Sublease; and (iii) in the case of a proposed Transfer to an affiliate, the entity status is not established as a subterfuge in an attempt to avoid the provisions of this Sublease respecting assignment and subletting. 9.2 Required Notice. If Sublessee requests Sublessor's consent to a --------------- Transfer, Sublessee, together with such request, shall provide Sublessor with the name of the proposed transferee and the nature of the business of the proposed transferee, the term, use, rental rate and all other material terms and conditions of the proposed Transfer, including, without limitation, a copy of the proposed assignment, sublease or other contractual documents and evidence satisfactory to Sublessor that the proposed transferee is financially sound. Notwithstanding Sublessor's agreement to act reasonably under subparagraph 9.1 above, Sublessor may, within thirty (30) days after its receipt of all information and documentation required herein consent to or reasonably refuse to consent to such Transfer in writing. In the event Sublessor consents to any such Transfer, the Transfer and consent thereto shall be in a form reasonably approved by Sublessor, and Sublessee shall bear all actual costs and expenses incurred by Sublessor in connection with the review and approval of such assignment or sublease documentation. 9.3 Bonus Rent. If Sublessor consents to any Transfer pursuant to ---------- this Paragraph 9, Sublessee may, within one hundred twenty (120) days thereafter, enter into such assignment or sublease of the Sublease Premises or portion thereof upon the terms and conditions set forth in the notice furnished to Sublessee pursuant to subparagraph 9.2 above. However, one 6. hundred percent (100%) of any rent or other consideration for the first year of the Sublease and fifty percent (50%) of any rent or other consideration for the remainder of the Sublease realized by Sublessee under any such assignment or sublease (the "Transfer Consideration") in excess of the Base Monthly Rent and Additional Rent payable hereunder (or the amount thereof proportionate to the portion of the Sublease Premises subject to such sublease or assignment) shall be paid to Sublessor, after deducting therefrom all actual costs and reasonable expenses incurred by Sublessee to effect the transfer including but not limited to rent concessions, advertising costs any customary brokers' commissions and reasonable attorneys' fees in connection with such assignment or sublease amortized on a straight line basis (without interest) over the term of the sublease or assignment. Sublessee hereby covenants and agrees to promptly pay to Sublessor the Transfer Consideration as and when received by Sublessee, but in no event more than ten (10) days after receipt thereof. 9.4 Effect of Transfer. Any Transfer consented to by Sublessor in ------------------ accordance with this Paragraph 9 shall be only for the use permitted by Section 5.1 of the Master Lease and for no other purpose. In no event shall any Transfer release or relieve Sublessee or any Guarantor from any obligations under this Sublease. 10. Sublessor's Representations, Warranties and Covenants. Sublessor ----------------------------------------------------- hereby represents and warrants to Sublessee that as of the commencement of the Sublease (i) that the document attached as Exhibit A to this Agreement is a true, correct and complete copy of the Master Lease, and that the Master Lease represents the entire agreement between Sublessor and Master Lessor with respect to the lease of the Sublease Premises, (ii) that, to the best knowledge Of Sublessor, there is no default, or any condition which with the passage of time or the giving of notice, or both, would constitute a default, on the part of either party to the Master Lease, (iii) Sublessor has not assigned, encumbered or otherwise transferred any interest of Tenant under the Master Lease with respect to the Sublease Premises, (iv) the Expiration Date of the Master Lease is December 31, 2002, and (v) there are no third party consents required with respect to this lease transaction other than the consent of Master Lessor; and Sublessor has duly authorized this lease transaction. 11. Amendments to Master Lease. Sublessor agrees that it shall not, -------------------------- without the prior written consent of Sublessee, which consent shall not be unreasonably withheld or delayed, enter into any amendment to the Master Lease which prevents or materially adversely affects the use by Sublessee of the Sublease Premises in accordance with the terms of this Sublease, materially increases the obligations of Sublessee under this Sublease or materially decreases Sublessee's rights under this Sublease. 12. Miscellaneous ------------- 12.1 Attorney's Fees. If either Sublessor or Sublessee brings any --------------- action or proceeding, whether legal, equitable or administrative, to enforce rights and obligations under this Sublease, or to declare rights hereunder, the prevailing party in any such action or proceeding shall be entitled to recover from the other party reasonable attorneys' fees and costs of suit, in addition to any other relief allowed by the court. 12.2 Brokers. The parties agree that they have dealt with no real ------- estate broker in connection with this Sublease other than Cornish and Carey, and they agree to indemnify and hold each other harmless from and against any damage or expense incurred by reason of any other broker claiming a right to any commission or compensation as a result of its dealings with the indemnifying party. 12.3 Authority to Execute. Sublessee and Sublessor each represent -------------------- and warrant to the other that the person(s) executing this Sublease on behalf of each party is (are) duly 7. authorized to execute and deliver this Sublease on that party's behalf. 12.4 Notices. Any notice required or permitted to be given under ------- this Sublease, including any change of address for purpose of giving notice, shall be in writing, and shall be given as provided in Section 20.16 of the Master Lease. For purposes of this Sublease, the addresses of the parties are set forth below: Sublessor --------- Apple Computer, Inc. One Infinite Loop Mail Stop 35-AOK Cupertino, CA 95014 Attention: Real Estate Department With copies of default notices only to: ------------------------ Apple Computer, Inc. One Infinite Loop Cupertino, CA 95014 Attention: General Counsel/esm Sublessee --------- NVidia 3535 Monroe Street Santa Clara, CA 95051 12.5 Incorporation of Prior Agreements. This Sublease incorporates --------------------------------- all agreements of the parties with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, whether oral or written. 12.6 Modifications, This Sublease may be modified or amended only by ------------- an instrument in writing, executed by both parties in interest hereunder. 12.7 Governing Law; Severability. This Sublease shall be governed by --------------------------- and construed in accordance with the laws of the State of California. If any term or provision of this Sublease is found by a court of competent jurisdiction to be void or unenforceable, such term or provision shall be deemed severed from the remainder of the terms and provisions of this Sublease, and said remainder shall remain in full force and effect, according to its terms, to the extent permitted by law. 12.8 Parking. Subject to the provisions of Section 18.1 of the ------- Master Lease, Sublessee shall have the non-exclusive right at no additional cost, to use all parking spaces located in the Outside Area as outlined in red on Exhibit D attached hereto. 12.9 Hazardous Materials. Attached hereto as Exhibit E is an ------------------- environmental report prepared by Kennedy/Jenks Consultants with respect to the Sublease Premises. Other than the information contained in such reports, Sublessor represents and warrants that it has not received any written notice of the release or disposal of any Hazardous Materials on or about the Sublease Premises in violation of any Hazardous Materials Laws. Sublessor represents and warrants that it has not released or disposed of any Hazardous Materials on or about the Sublease Premises in violation of Hazardous Materials Laws. Except as otherwise provided herein and except for the foregoing representation, Sublessor makes no representation or warranty of any kind whatsoever with respect to any Hazardous Materials on or about the Premises. 8. 12.10 Signage. Sublessee's signage rights shall be subject to the ------- provisions of Section 20.12 of the Master Lease, as amended hereby. 12.11 Subordination; Nondisturbance Agreement. Prior to the --------------------------------------- Commencement Date, Sublessor shall request from Master Lessor, a nondisturbance agreement from Master Lessor's lender which is reasonably acceptable to Sublessee, and shall use reasonable efforts to obtain the same from Master Lessor; provided, however, Sublessee's receipt of a non-disturbance agreement from Master Lessor's lender shall not be a condition of this Sublease. 12.12 Exhibits. Subject to the terms hereof, all exhibits attached --------- hereto are incorporated herein. 13. Landlord's Lien. Notwithstanding anything herein to the contrary, --------------- but subject to any rights Sublessor may have under Exhibit C, Sublessor waives any and all rights, title and interest Sublessor now has, or hereafter may have, whether statutory or otherwise, to Sublessee's inventory, equipment, furnishings, trade fixtures, books, and records, personal property, tenant improvements paid for by Sublessee located at the Premises (singly and/or collectively, the "Collateral"). Sublessor acknowledges that Sublessor has no lien, right, claim, interest or title in or to the Collateral. Sublessor further agrees that Sublessee shall have the right, at its discretion, to mortgage, pledge, hypothecate or grant a security interest in the arrangement related to the conduct of Sublessee's business at the Premises. The Collateral shall not become the property of Sublessor and may be removed by Sublessee or at any time and from time to time during the entire term of this Lease. Sublessee shall promptly repair any damage caused by the removal of such property, whether effected by Sublessee. 14. Furniture Purchase. Concurrently herewith, Sublessor agrees to sell ------------------ 223 cubicle work stations to include files and chairs and existing white board (collectively the "Furniture") subject to the terms set forth in the attached Exhibit F ("Furniture") to the Sublease. Sublessor acknowledges that the agreement to sell the Furniture to Sublessee on the terms and conditions set forth herein is a material inducement for Sublessee to enter into this Sublease and the consummation of such sale on the terms and conditions reasonable satisfactory to Sublessee shall be condition of this transaction. 15. Effectiveness; Consent of Master Landlord. This Sublease shall be of ----------------------------------------- no force or effect unless and until the Master Lessor has executed and delivered to Sublessee and Sublessor a fully executed consent to this Sublease, which the Parties will pursue promptly and in good faith. 9. IN WITNESS WHEREOF, Sublessor and Sublessee have executed this Sublease on the dates set forth below, to be effective as of the date first set forth above. SUBLESSOR: SUBLESSEE: APPLE COMPUTER, INC. NVIDIA, INC. By: By: -------------------------------- -------------------------------- Its: Its: ------------------------------- ------------------------------- Date: Date: ------------------------------ ------------------------------ LESSOR'S CONSENT Subject to the conditions listed below, MPJ, a California general partnership ("Lessor"), hereby consents to the forgoing Sublease between Apple Computer, Inc., a California corporation ("Sublessor"), and NVidia, a Delaware corporation ("Sublessee"), dated April 2, 1998 (the "Sublease"). The foregoing consent of Lessor is subject to the following conditions: 1. This Consent shall not relieve Sublessor of any liability or obligations under the Master Lease and Sublessor shall continue to remain liable under the Master Lease as a principal obligor and not as a surety. 2. This Consent shall not be deemed to be a consent to any future sublease and any further subletting of the Premises shall require the prior written consent of Lessor. 3. This Consent shall not be deemed to be a consent to any construction of any tenant improvements other than Sublessee's Improvements as set forth in Exhibit G of the Sublease, which Improvements neither Tenant under the Master Lease, nor Sublessee shall have any restoration obligations to the Premises and neither party shall be required to remove such Improvements at the termination of the Sublease or Master Lease. Exhibit G plans are attached and initialed by the parties, and made a part hereof. 4. Except as provided herein, this Consent shall not alter or amend any term of provision of the Master Lease, all of which shall remain unamended and in full force and effect. 5. Lessor shall be provided a Certificate of Insurance evidencing Sublessee's coverage under the terms of the Lease, naming MPJ and South Bay Development as additional insured. 6. Notwithstanding anything in the Sublease to the contrary, Lessor does not agree to execute and deliver a nondisturbance agreement and does not agree that it will be bound by the terms of the Sublease if the Master Lease terminates. 7. Master Lessor represents and warrants to Sublessee that it is not aware of any defaults on the part of Sublessor, and there are no defaults on the part of Master Lessor at the time of execution hereof. IN WITNESS WHEREOF, Landlord has executed this Consent on the date set forth opposite of its signatures MPJ, a California General Partnership Dated: By: ---------------------- -------------------------------------- James D. Mair, General Partner By: -------------------------------------- W. Leslie Pelio, General Partner By: -------------------------------------- William F. Jury, General Partner The foregoing conditions to Lessor's Consents are hereby accepted. "SUBLESSEE" NVidia, a Delaware corporation By: -------------------------------------- Print: ---------------------------------- Title: ---------------------------------- Date: ----------------------------------- "SUBLESSOR" Apple Computer, Inc., a California corporation By: -------------------------------------- Print: ---------------------------------- Title: ---------------------------------- Date: ----------------------------------- EXHIBIT A MASTER LEASE ------------ EXHIBIT A SIXTH AMENDMENT TO LEASE ------------------------ THIS SIXTH AMENDMENT TO LEASE (the "Amendment") is made and entered into as of December 22, 1995 by and between MPJ, a California general partnership ("Landlord"), and a APPLE COMPTER, INC., a California corporation ("Tenant"), with reference to the following facts. RECITALS -------- A. Tenant and Landlord entered into a certain lease agreement dated June 1, 1988, amended by that certain Memorandum of Lease dated June 1, 1998; First Amendment to Lease dated May 31, 1989, that certain Second Amendment to Lease dated November 9, 1989, that certain Third Amendment to Lease dated February 8, 1995, that certain Fourth Amendment to Lease dated March 29, 1995, and that certain Fifth Amendment to Lease dated June 20, 1995 (as amended, the "Lease"), pursuant to which Tenant leases from Landlord certain premises described in the Lease (the "Premises") and located in the building known as the Lawrence Business Center in Santa Clara, California (the "Building"). B. In order to facilitate the making of a loan from Connecticut General Life Insurance Company to Landlord to finance the Building, Landlord and Tenant wish to amend paragraph ten (10) of Fourth Amendment to the Lease in certain respects set forth below to provide for the disposition of the lease termination fee provided for in the Lease. AGREEMENT --------- In consideration of the recitals set forth above and the covenants contained herein, Landlord and Tenant hereby agree as follows: 1. Lease Termination Notice. Paragraph 10(a) of the Fourth Amendment to ------------------------ Lease is hereby amended by adding the following language at the end of the paragraph: "Tenant and Landlord further agree to promptly give Lender written notice of any election by Tenant to exercise any option to terminate the Lease prior to its stated expiration date. The notice address for Lender is Connecticut General Life Insurance Company, 900 Cottage Grove Road, Bloomfield, CT, 06002, Attention: Real Estate Investment." 2. Lease Termination Fee. Paragraph 10(b) of the Fourth Amendment to --------------------- Lease is here by amended by adding the following language to the end of the paragraph: "Landlord and Tenant hereby further agree that any payment due and payable by Tenant to Landlord under the Lease as consideration, fee or penalty for any option of Tenant under the Lease to terminate the Lease prior to its stated expiration date (a "Termination Fee") shall be paid by Tenant directly to an escrow account established and controlled solely by Connecticut General Life Insurance Company ("Lender") in accordance with such instructions as Lender shall deliver to Tenant or Landlord. Tenant agrees that it will not make any payment of any such Termination Fee under the Lease, or any portion thereof, directly to Landlord without prior written consent from Lender, and Landlord agrees that it will neither accept nor request any payment of any such Termination Fee directly from Tenant without prior written consent from Lender." 3. Third-Party Beneficiary. Tenant and Landlord hereby acknowledge and ----------------------- agree that Lender (and any of its successors or assigns), is a third-party beneficiary of the provisions of this Amendment. 4. No Other Modifications. Except as specifically set forth in this ---------------------- Amendment, all provisions of the Lease shall remain in full force and effect. 5. Authority. Each of the persons executing this instrument on behalf of --------- a party hereto does hereby covenant and warrant that such party is a duly authorized and existing entity, that such party has full right and authority to fulfill each of its responsibilities and obligations hereunder, and that each and all of the persons signing on behalf of such party are authorized to do so. Upon any party's request, any other party hereto will provide the requesting party with evidence reasonably satisfactory to the requesting party confirming the foregoing covenants and warranties. 6. Successors and Assigns. All provisions of this instrument will be ---------------------- binding upon and inure to the benefit of, the parties hereto, their successors and assigns. 7. General Provisions. (a) No waiver by any party of any of the ------------------ provisions of this Amendment will be effective unless in writing and signed by an authorized representative of the party making such waiver, and then only to the extent expressly provided in such written waiver. (b) Time is of the essence. (c) This Amendment will be governed by California law. (d) The captions preceding the sections of this instrument have been inserted for convenience of reference and such captions in no way define or limit the scope or intent of any provision hereof. (e) This Amendment may be executed in separate counterparts, each of which, when taken together shall constitute a single document. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. TENANT: ------ APPLE COMPUTER, INC. A California corporation By: /s/ Robert A.Hecox ---------------------------- Robert A. Hecox Director, Real Estate ---------------------------- Its_________________________ LANDLORD: -------- MJP, a California general partnership /s/ James D. Mair By ---------------------------- James D. Mair General Partner /s/ William F. Jury By ---------------------------- William F. Jury General Partner /s/ W. Leslie Pelio By _________________________ W. Leslie Pelio General Partner FIFTH AMENDMENT TO LEASE This Fifth Amendment to Lease is made and entered into as of June 20, 1995, by and between MPJ, a California general partnership ("Landlord") and APPLE COMPUTER, INC., a California corporation ("Tenant") with reference to the following facts, understandings and intentions: A. Landlord and Tenant entered into a Lease Agreement dated as of June 1, 1988 covering certain premises located in the City of Santa Clara, California (the "Original Lease"). The Original Lease was amended by a First Amendment to Lease dated as of May 31, 1989 (the "First Amendment"), by a Second Amendment to Lease dated as of November 9, 1989 (the "Second Amendment"), by a Third Amendment to Lease dated as of February 8, 1995 (the "Third Amendment") and by a Fourth Amendment to Lease dated as of March 29, 1995 (the "Fourth Amendment"). The Original Lease as amended by the First Amendment, Second Amendment, Third Amendment and Fourth Amendment is hereinafter referred to as the "Lease". B. The parties desire to amend the Lease by, among other things, deleting Building A from the Premises covered by Lease effective as of June 20, 1995. NOW, THEREFORE, Landlord and Tenant hereby agree that the Lease is amended as follows: 1. Effective as of June 20, 1995, Building A (as shown on the Site Plan attached to the Original Lease as EXHIBIT "A") is deleted from the Premises covered by the Lease. Accordingly, from and after June 1, 1995, the Premises shall include only Buildings B, C and D. Landlord hereby accepts Building A in its "as-is" condition including the building's roof and operating systems. Tenant shall have no further responsibility or liability for any repairs, replacement or restorations to Building A. In addition, Landlord and Tenant expressly agree that the items listed on the inspection report prepared by Therma for National Semiconductor dated May 1995 for 3565 Monroe, Santa Clara, California ( a copy of which report is attached hereto as EXHIBIT "A") are not the responsibility of Tenant and Tenant shall have no responsibility for repairs or have any liability for any cost for those items listed in this report. 2. Notwithstanding the deletion of Building A from the Premises effective as of June 20, 1995, Tenant shall pay to Landlord the Base Monthly Rent and Additional Rent applicable to Building A for the entire month of June, 1995. Landlord hereby acknowledges receipt of such payment. 3. On or before June 30, 1995, Tenant shall pay to Landlord, 1 as a lease termination payment and in addition to all other amounts due under the Lease, the sum of ______________________. 4. Landlord and Tenant acknowledge and agree that the Base Monthly Rent for Buildings B, C & D payable by Tenant to Landlord pursuant to Section 3.1 of the Lease during the period July 1, 1995 through December 31, 1995, shall be the sum of 5. Notwithstanding the actual date on which Building A is deleted from the Premises, Landlord and Tenant agree that effective as of July 1, 1995, Tenant's Pro Rata Share as defined in Section 3.4 of the Lease, shall be: 218,816/275,264 or 79.49% 6. The first sentence of the second grammatical paragraph of Section 18.1 of the Lease is deleted in its entirety and the following language is substituted in lieu thereof: Tenant shall have the exclusive right to use all parking spaces located in the Outside Area except for the parking spaces located in the portion of the Outside Area highlighted on Exhibit "B" attached hereto and made a part hereof (the "Excluded Area"). The parking area in the Excluded Area shall be for the exclusive use of the lessee of Building A and its employees and invitees. Tenant shall not park or permit its employees or invitees to park in the parking spaces located in the Excluded Area. 7. Tenant shall modify any of its existing signs to delete any reference to "3565" or "3865 Monroe". A new monument sign may be constructed by Landlord or the new lessee of Building A provided the monument sign is constructed to the left of the existing transformer, as Building A is faced from Monroe Street. 8. Except as modified herein, the Lease shall remain unamended and in full force and effect. [DOCUMENT CONTINUES] 2 IN WITNESS WHEREOF, Landlord and Tenant have executed this Fourth Amendment to Lease as of the day and year first above-written. LENDER: TENANT: MPJ, APPLE COMPUTER, INC., a California general a California corporation partnership /s/ James D. Mair /s/ Robert A. Hecox By: --------------------------- By: ------------------------ JAMES D. MAIR Its: General Partner Name:_______________________ --------------------------- Robert A. Hecox Title: Director, Real Estate 6/16/95 /s/ William F. Jury --------------------- By: --------------------------- WILLIAM F. JURY Its: General Partner --------------------------- /s/ W. Leslie Pelio By: --------------------------- W. LESLIE PELIO Its: General Partner --------------------------- 3 EXHIBIT "A" - -------------------------------------------------------------------------------- [LETTERHEAD OF THERMA APPEARS HERE] - -------------------------------------------------------------------------------- Attention: Eric Bergtraun From our recent inspection we make the following recommendations: AC-1 - ---- Replace filters, belt, leaking first stage sight glass, supply fan motor bearings; adjust and properly set power exhaust dampers, economizer and inlet vane actuators; clean condenser coil, condensate pan, and pipe condensate drain P-trap to drain: ...................................................................... $1,963.73 Air Handler 1 - ------------- Replace filter and reglue insulation on fan access panel:............. $91.51 Condensing Unit 1 - ----------------- Operating normally at this time. AC-2 - ---- Replace filters, belts, exhaust fan motor pulley, supply fan motor bearings, exhaust fan motor bearings; rewire morning warmup (currently disconnected); verify operation*; adjust inlet vanes for proper operation; clean condensate pan; resecure condensate piping; clean condenser coils and compartment. First stage refrigerant circuit low on charge. Need to locate leak, repair and recharge with refrigerant. Oil is noted around liquid line solenoid valve. May need to be replaced (to be determined at completion of leak repairs): .................................................................... $2,964.43** AC-3 - ---- Replace belts and filters; clean condensate pan, condenser coils; resupport condensate piping; replace two leaking compressor oil sight glasses; verify operation*: .................................................................... $1,427.30 AC-4 - ---- Replace belts, filters, supply fan shaft bearings, motor bearings, first and second stage oil sight glasses; adjust inlet vanes. First stage refrigeration circuit has no charge. Need to locate leak, repair and recharge with refrigerant**; replace liquid line filter drier: .................................................................... $2,899.77 National Semiconductor/Apple 1 Inspection Report 3565 Monroe, Santa Clara May 1995 - -------------------------------------------------------------------------------- AC-6 - ---- Replace belt, filter, supply fan shaft bearings, clean and degrease compressors: ...................................................................... $997.24 AC-7 Replace filters, reconnect economizer*, verify operation:............. $ 489.60 AC-8 - ---- Replace filters and belt:............................................. $69.39 BOILER 1 - -------- Resecure loose pipe insulation; clean burner pan and compartment; lag down boiler pump: ......................................................... $352.03 EF-1 - ---- Replace belt and motor bearing:....................................... $ 521.25 EF-3 - ---- Operating normally at this time. EF-4 - ---- Replace motor......................................................... $ 659.99 EF-5 - ---- Operating normally at this time. EF-6 - ---- No power to motor. Visually appears to be okay--will need power in order to check. EF-7 - ---- Replace motor......................................................... $609.05 EF-8 - ---- No power to motor--cannot verify operation. National Semiconductor/Apple 1 Inspection Report 3565 Monroe, Santa Clara May I995 - -------------------------------------------------------------------------------- EF-9 - ---- Replace motor:.......................................................... $609.05 EF-10 - ----- No power to motor. Visually appears to be okay--will need power in order to check. EF-11 - ----- Was used for chamber. No longer in building. Need to resecure exhaust stack: ........................................................................ $148.00 EF-13 - ----- Replace motor:.......................................................... $609.05 EF-14 - ----- No power to motor. Visually appears okay. EF-15 - ----- Operating normally at this time. EF-16 - ----- Replace motor:.......................................................... $609.05 EF-17 - ----- Replace motor:.......................................................... $609.05 AIR STATION - ----------- Degrease and clean air compressor, tighten all fittings, clean air tank auto drain, reconnect drain piping, remove and plug leaking manual drain:.................................................................. $375.26 Note: Air compressor is oversized for application. TIME CLOCK PANEL - ---------------- Replace four burned out indicator lights:............................... $180.33 EXHAUST DUCT - ------------ Need to cap duct where fan was removed:................................. $251.08 National Semiconductor/Apple 1 Inspection Report 3565 Monroe, Santa Clara May 1995 - -------------------------------------------------------------------------------- FUME HOOD EXHAUST - ----------------- Replace belt:.......................................................... $41.29 In general there is miscellaneous abandoned electrical on roof for removed equipment. Materials will need to be ordered. Please allow 3-5 days for availability upon authorization. * Should further repairs be diagnosed as needed, they will be quoted as discovered. ** Refrigerant leak repairs do not include replacement of components except as noted. Should a component be diagnosed as needed, it will be quoted. If you have any questions or I can be of assistance, please give me a call. Sincerely, /s/ Diana Rossi Diana Rossi: Authorized by: __________________________________ Date: ________________ P.O. #: ________________________ [MAP OF MONROE STREET BUILDINGS APPEARS HERE] EXHIBIT B FOURTH AMENDMENT TO LEASE This Fourth Amendment to Lease is made and entered into as of March 29, 1995, by and between MPJ, a California general partnership ("Landlord") and APPLE COMPUTER, INC., a California corporation ("Tenant") with reference to the following facts, understandings and intentions: A. Landlord and Tenant entered into a Lease Agreement dated as of June 1, 1988 covering certain premises located in the City of Santa Clara, California (the "Original Lease"). The Original Lease was amended by a First Amendment to Lease dated as of May 31, 1989 (the "First Amendment"), by a Second Amendment to Lease dated as of November 9, 1989 (the "Second Amendment") and a Third Amendment to Lease dated as of February 8, 1995 (the "Third Amendment"). The Original Lease as amended by the First Amendment, Second Amendment and Third Amendment is hereinafter referred to as the "Lease". B. The parties desire to amend the Third Amendment in its entirety and replace it with this Fourth Amendment. C. The term of the Lease is currently scheduled to end on December 31, 1995. D. The parties desire to amend the Lease by, among other things, extending the term of the Lease for seven (7) years, and deleting Building A from the Premises covered by Lease effective as of January 1, 1996. NOW, THEREFORE, Landlord and Tenant hereby agree that the Lease is amended as follows: 1. The Third Amendment is deleted in its entirety and shall no longer have any force or effect. This Fourth Amendment supersedes and replaces the Third Amendment. 2. The term of the Lease is hereby extended for an additional period of seven (7) years beginning on January 1, 1996 and ending on December 31, 2002. 3. Effective as of January 1, 1996, Building A (as shown on the Site Plan attached to the Original Lease as Exhibit "A") is deleted from the Premises covered by the Lease. Accordingly, from and after January 1, 1996, the Premises shall include only Buildings B, C and D. The Lease shall remain in full force and effect with respect to Building A through and including December 31, 1995. On or before December 31, 1995, Tenant shall surrender Building A to Landlord in the condition required by Section 7.2.D of the Original Lease and Paragraphs 7 and 8 of the First Amendment. 1 4. The Base Monthly Rent payable by Tenant to Landlord pursuant to Section 3.1 of the Lease during the period January 1, 1996 through December 31, 2002, shall be the following respective sums during the following respective time periods: TIME PERIOD BASE MONTHLY RENT ----------- ----------------- 1/01/96 - 6/30/98 7/01/98 - 12/31/2000 1/01/2001 - 12/31/2002 5. Effective as of January 1, 1996, Tenant's Pro Rata Share as defined in Section 3.4 of the Lease, shall be: 218,816/275,264 or 79.49% 6. Section 17.1 of the Lease is deleted in its entirety. 7. The first sentence of the second grammatical paragraph of Section 18.1 of the Lease is deleted and the following language is substituted in lieu thereof: Tenant shall have the nonexclusive right to use seventy-nine percent (79%) of all parking spaces located in the Outside Area. If Landlord or Tenant requests, Landlord shall designate Seventy-nine percent (79%) of the parking spaces located in the Outside Area for Tenant's exclusive use. 8. Section 19 of the Lease is deleted in its entirety. 9. The first and second grammatical paragraphs of Section 6 of the Second Amendment are amended in their entirety to read as follows: Tenant is hereby granted one additional option to extend the term of this Lease for one period of three (3) years (the "Second Option Term"), such extension to be on the same terms and conditions as the initial term, except for the Base Monthly Rent which shall be determined as provided below. It shall be a condition precedent to the exercise of the Second Option Term that Tenant shall not be in default under this Lease at the time of exercise of such Second Option. If Tenant elects to exercise the Second Option, Tenant shall exercise said Second Option only by written notice delivered to Landlord not later than June 30, 2002. There shall be no further options to extend the term of this Lease at 2 the end of the Second Option Term. The Base Monthly Rent payable during the Second Option Term shall be (i) the greater of ninety-two (92%) of the fair market rental for the premises, or (ii) 10. At any time on or after January 1, 2000, Tenant shall have the right to terminate this Lease only by doing all of the following: (a) Giving Landlord, at any time on or after January 1, 1999 but at least twelve (12) months prior to Tenant's desired early termination date, written notice ("Tenant's Early Termination Notice") stating that Tenant elects to terminate the term of this Lease pursuant to this Paragraph l0 and specifying Tenant's desired early termination date (the "Early Termination Date"), which date must be at least twelve (12) months following Landlord's receipt of Tenant's Early Termination Notice and shall in no event be earlier than January 1, 2000; and (b) Paying to Landlord, concurrently with the Early Termination Date, a cash sum equal to ___________ of all of the Base Monthly Rent and Additional Rent that would have been payable under the Lease from and after the Early Termination Date through December 31, 2002 discounted to its then present value at a discount rate equal to the Bank of America Reference Rate in effect at the time of the Early Termination Date. (For purposes of determining the Additional Rent that would have been payable after the Early Termination Date, it shall be assumed that the Additional Rent would have increased after the Early Termination Date at the rate of three percent (3%) per year). This payment shall be in addition to, and shall not be credited against, the Base Monthly Rent and Additional Rent due under this Lease prior to the Early Termination Date. During the twelve (12) month or more period of time between the date Tenant exercises its early termination right and the Early Termination Date, Tenant shall continue to be obligated to perform all of its obligations under the Lease, including payment of all Base Monthly Rent and Additional Rent accruing through and including the Early Termination Date. 11. Except as modified herein, the Lease shall remain unamended and in full force and effect. [DOCUMENT CONTINUES] 3 IN WITNESS WHEREOF, Landlord and Tenant have executed this Fourth Amendment to Lease as of the day and year first above-written. LENDER: TENANT: MPJ, APPLE COMPUTER, INC., a California general a California corporation partnership By: /s/ James D. Mair By: /s/ Joseph A. Graziano --------------------------- --------------------------------- JAMES D. MAIR Its: General Partner Name: JOSEPH A. GRAZIANO -------------------------- ------------------------------- By: /s/ W. Leslie Pelio Title: Executive Vice President and Chief Financial Officer --------------------------- ------------------------------ W. LESLIE PELIO 4/4/95 ------------------------------ Its: General Partner -------------------------- By: /s/ William F. Jury --------------------------- WILLIAM F. JURY Its: General Partner -------------------------- 4 THIRD AMENDMENT TO LEASE This Third Amendment to Lease is made and entered into as of February 8, 1995, by and between MPJ, a California general partnership ("Landlord") and APPLE COMPUTER, INC., a California corporation ("Tenant") with reference to the following facts, understandings and intentions: A. Landlord and Tenant entered into a Lease Agreement dated as of June l, 1988 covering certain premises located in the City of Santa Clara, California (the "Original Lease"). The Original Lease was amended by a First Amendment to Lease dated as of May 31, 1989 (the "First Amendment") and by a Second Amendment to Lease dated as of November 9, 1989 (the "Second Amendment"). The Original Lease as amended by the First Amendment and Second Amendment is hereinafter referred to as the "Lease". B. The term of the Lease is currently scheduled to end on December 31, 1995. C. The parties desire to amend the Lease by, among other things, extending the term of the Lease for seven (7) years, and deleting Buildings A and D from the Premises covered by Lease effective as of January 1, 1996. NOW, THEREFORE, Landlord and Tenant hereby agree that the Lease is amended as follows: 1. The term of the Lease is hereby extended for an additional period of seven (7) years beginning on January 1, 1996 and ending on December 31, 2002. 2. Effective as of January 1, 1996, Buildings A and D (as shown on the Site Plan attached to the Original Lease as Exhibit "A") are deleted from the Premises covered by the Lease. Accordingly, from and after January 1, 1996, the Premises shall include only Buildings B and C. The Lease shall remain in full force and effect with respect to Buildings A and D through and including December 31, 1995. On or before December 31, 1995, Tenant shall surrender Buildings A and D to Landlord in the condition required by Section 7.2.D of the Original Lease and Paragraphs 7 and 8 of the First Amendment. 3. The Base Monthly Rent payable by Tenant to Landlord pursuant to Section 3.1 of the Lease during the period January 1, 1996 through December 31, 2002, shall be the following respective sums during the following respective time periods: 1 TIME PERIOD BASE MONTHLY RENT ----------- ----------------- 1/01/96 - 6/30/98 7/01/98 - 12/31/2000 1/01/2001 - 12/31/2002 4. Effective as of January 1, 1996, Tenant's Pro Rata Share as defined in Section 3.4 of the Lease, shall be: 166,352/275,264 or 60.43% 5. Section 17.1 of the Lease is deleted in its entirety. 6. The first sentence of the second grammatical paragraph of Section 18.1 of the Lease is deleted and the following language is substituted in lieu thereof: Tenant shall have the nonexclusive right to use sixty percent (60%) of all parking spaces located in the Outside Area. If Landlord or Tenant requests, Landlord shall designate sixty percent (60%) of the parking spaces located in the Outside Area for Tenant's exclusive use. 7. Section 19 of the Lease is deleted in its entirety. 8. The first and second grammatical paragraphs of Section 6 of the Second Amendment are amended in their entirety to read as follows: Tenant is hereby granted one additional option to extend the term of this Lease for one period of three (3) years (the "Second Option Term"), such extension to be on the same terms and conditions as the initial term, except for the Base Monthly Rent which shall be determined as provided below. It shall be a condition precedent to the exercise of the Second Option Term that Tenant shall not be in default under this Lease at the time of exercise of such Second Option. If Tenant elects to exercise the Second Option, Tenant shall exercise said Second Option only by written notice delivered to Landlord not later than June 30, 2002. There shall be no further options to extend the term of this Lease at the end of the Second Option Term. The Base Monthly Rent payable during the Second Option Term shall be (i) the greater of the fair market rental for 2 the premises, or (ii) 9. At any time on or after January 1, 2000, Tenant shall have the right to terminate this Lease only by doing all of the following: (a) Giving Landlord, at any time on or after January 1, 1999 but at least twelve (12) months prior to Tenant's desired early termination date, written notice ("Tenant's Early Termination Notice") stating that Tenant elects to terminate the term of this Lease pursuant to this Paragraph 9 and specifying Tenant's desired early termination date (the "Early Termination Date"), which date must be at least twelve (12) months following Landlord's receipt of Tenant's Early Termination Notice and shall in no event be earlier than January 1, 2000; and (b) Paying to Landlord, concurrently with the Early Termination Date, a cash sum equal to ___________ of all of the Base Monthly Rent and Additional Rent that would have been payable under the Lease from and after the Early Termination Date through December 31, 2002 discounted to its then present value at a discount rate equal to the Bank of America Reference Rate in effect at the time of the Early Termination Date. (For purposes of determining the Additional Rent that would have been payable after the Early Termination Date, it shall be assumed that the Additional Rent would have increased, after the Early Termination Date at the rate of three percent (3%) per year). This payment shall be in addition to, and shall not be credited against, the Base Monthly Rent and Additional Rent due under this Lease prior to the Early Termination Date. During the twelve (12) month or more period of time between the date Tenant exercises its early termination right and the Early Termination Date, Tenant shall continue to be obligated to perform all of its obligations under the Lease, including payment of all Base Monthly Rent and Additional Rent accruing through and including the Early Termination Date. 10. If Landlord from time to time shall receive a bona fide proposal or letter of intent (the "Third Party Proposal") from a third party to lease (i) all or any portion of Building D, or (ii) all or any portion of Building D together with all or any portion of Building A, and if Landlord is willing to accept such Third Party Proposal, Landlord shall notify Tenant in writing ("Landlord's Offer Notice") of the following basic business terms on which the Landlord is willing to lease such space (collectively referred to herein as "Basic Business Terms"): (a) The description of the space to be leased (the "Offered Space"); 3 (b) The term of the proposed lease; (c) The rent for the initial term or the formula to be used to determine such rent; (d) Any option or options to extend (including the rent to be charged during the extension periods); (e) The contribution, if any, Landlord is willing to make toward the cost of any tenant improvements; and (f) Any other material business terms Landlord elects to specify. Provided that (i) Tenant is not in default under this Lease, (ii) this Lease is in full force and effect, and (iii) Tenant has not assigned this Lease to an unaffiliated third party and is in physical occupancy of at least seventy- five percent (75%) of the area of the Premises, then Tenant shall have the right, for a period of ten (10) business days after Tenant's receipt of Landlord's Offer Notice, to lease the Offered Space on the Basic Business Terms contained in Landlord's Offer Notice and otherwise on the terms and conditions contained in this Lease, by giving written notice of such election prior to the expiration of such ten (10) business day period. Upon the giving of such notice, Tenant shall become obligated to lease the Offered Space and Landlord shall be obligated to lease the Offered Space to Tenant on the Basic Business Terms contained in Landlord's Offer Notice and otherwise on the terms and conditions of this Lease. Landlord and Tenant shall promptly execute an amendment to this Lease reflecting (i) the addition of the Offered Space as part of the Premises and (ii) the Basic Business Terms applicable to the Offered Space. (The parties understand that the term of the Lease as it applies to the Offered Space may be longer or shorter than the term of the Lease with respect to the remainder of the Premises). If Tenant does not deliver to Landlord its written election to lease the Offered Space, within said ten (10) business day election period, or if Tenant does not execute and deliver to Tenant the Amendment to Lease within ten (10) business days after Tenant's receipt thereof, then Landlord shall thereafter have the right, for a period of six (6) months, to lease the Offered Space to any third party on substantially the same Basis Business Terms as are set forth in Landlord's Offer Notice and on such form of lease as Landlord chooses. If the monetary terms of a third party lease (i.e., rent and Landlord's tenant improvement contribution) do not deviate by more than five percent (5%) from those Basic Business Terms specified in Landlord's Offer Notice, the Basic Business Terms of third party lease shall be deemed substantially the same as the Basic Business Terms specified in Landlord's Offer Notice. If Landlord does not enter into a lease with a third party within said six (6) month period, Tenant's rights under this Paragraph 10 4 shall revive. The provisions of this Paragraph 10 shall terminate upon (i) the expiration or earlier termination of this Lease, or (ii) any assignment by Tenant of its interest in this Lease to any unaffiliated third party or the subletting by Tenant of twenty-five percent (25%) or more of the Premises, or (iii) Tenant's failure to exercise its right of first refusal to lease granted herein at its first opportunity to do so (unless Landlord does not enter into a lease with a third party within the six (6) month period described above). 11. Except as modified herein, the Lease shall remain unamended and in full force and effect. IN WITNESS WHEREOF, Landlord and Tenant have executed this Third Amendment to Lease as of the day and year first above written. LANDLORD: TENANT: MPJ, APPLE COMPUTER, INC., a California general a California corporation partnership By: /s/ James D. Mair By: /s/ Joseph A. Graziano -------------------------- -------------------------------- JAMES D. MAIR Its: General Partner Name: JOSEPH A. GRAZIANO ------------------------- ------------------------------ By: /s/ William F. Jury Title: Executive Vice President and Chief Financial Officer -------------------------- ----------------------------- WILLIAM F. JURY 2-27-95 ----------------------------- Its: General Partner ------------------------- By: /s/ W. Leslie Pelio -------------------------- W. LESLIE PELIO Its: General Partner ------------------------- 5 SECOND AMENDMENT TO LEASE ------------------------- This Second Amendment to Lease is made and entered into as of November 9, 1989 by and between MPJ, a California general partnership (hereinafter "Landlord"), and APPLE COMPUTER, INC., a California corporation (hereinafter "Tenant"), whereby both parties agree to amend the Lease as follows: 1. The additional premises of 3515 and 3525 Monroe Street, Santa Clara, California will be added to the lease premises which are presently occupied by Altera Corporation and should be added at the termination date of Altera Corporation's lease and its vacancy of the premises, which is anticipated to be March 1, 1990. With the addition of this space, the Tenant's Pro Rata Share, as defined In Paragraph 3.4 of the Lease, shall be One Hundred Percent (100%) and the Outside Area, as defined in Paragraph 18, shall be amended to One Hundred Percent (100%) of the total Outside Area. Tenant shall accept the additional premises on an "as is" basis and Landlord shall not be obligated to pay for additional tenant improvements. 2. The additional rent for the expanded space shall be from the termination date through June 30, 1991 _________ July 1, 1991 through December 31, 1992. 3. Tenant hereby exercises its Option to Extend, pursuant to Paragraph 17 of the Lease, for the period January 1, 1993 through December 31, 1995 (hereinafter "Option Term"), except for rent. 4. The monthly installment of rent during the Option Term shall be 5. This Second Amendment supersedes any provisions contained in Paragraph 19 of the Lease. 6. Tenant is hereby granted one additional option to extend the term of this Lease for one period of three (3) years (the "Second Option Term"), such extension to be on the same terms and conditions as the initial term, except for the Base Monthly Rent which shall be determined as provided below. It shall be a condition precedent to the exercise of the Second Option Term that Tenant shall not be in default under this Lease at the time of exercise of such Second Option. If Tenant elects to exercise the Second Option, Tenant shall exercise said Second Option only by written notice delivered to Landlord at least one hundred and twenty (120) days prior to the expiration of the Option Term of this Lease. There shall be no further options to extend the term of this Lease at the end of the Second Option Term. Monthly installment of base rent payable during the Second Option Term shall be (i) the the fair market rental for the premises, or (ii) month. Promptly following the exercise of the Second Option by Tenant, the parties shall endeavor to agree upon the Fair Market Rental of the Premises as of the first day of the Second Option Term in question. In determining the Fair Market Rental for the Premises, the Premises shall be compared only to buildings of a similar quality and size and with similar improvements and amenities in the Santa Clara/Cupertino area. If, within fifteen (15) days after exercise of any Second Option, the parties cannot agree upon the Fair Market Rental for the Premises as of the first day of the Second Option Term in question, the parties shall submit the matter to binding appraisal in accordance with the following procedures: (i) Within thirty (30) days after exercise of the Second Option, the parties shall either jointly appoint an appraiser for the purpose of determining Fair Market Rental, or failing that, separately appoint a disinterested appraiser. No person shall be appointed an appraiser unless he has at least five (5) years experience in appraising major office and R&D properties in the Santa Clara/Cupertino area and is a member of a recognized society of real estate appraisers. (ii) If, within thirty (30) days after their appointment, the two appraisers agree on the Fair Market Rental for the Premises as of the first day of the Second Option Term in question, that value shall be binding and conclusive upon the parties. If the two appraisers thus appointed cannot so agree, they shall appoint a third disinterested appraiser having like qualifications. If, within thirty (30) days after the appointment of the third appraiser, a majority of the appraisers agree on the Fair Market Rental of the Premises as of the first day of the Second Option Term in question, that value shall be binding and conclusive upon the parties. If, within thirty (30) days after the appointment of the third appraiser, a majority of the appraisers cannot so agree, the three appraisers shall each submit their independent appraisals to the parties; the appraisal farthest from the median of the three appraisals shall be disregarded, and the mean average of the remaining two appraisals shall be deemed the Fair Market Rental of the Premises as of the first day of the Second Option Term in question, and shall be binding and conclusive upon the parties. (iii) Each party shall pay the fees and expenses of the appraiser appointed by it and shall share equally the fees and expenses of the third appraiser. (iv) If the two appraisers appointed by the parties cannot agree on the appointment of the third appraiser, they shall give notice of such failure to the parties. If the parties fail to agree upon the selection of a third appraiser within ten (10) days after the appraisers give such notice, either of the parties may, upon notice to the other, apply for such appointment to the presiding judge of the Superior Court of Santa Clara County, California. All other terms and conditions of the Lease shall remain the same. LANDLORD: MPJ, a California TENANT: APPLE COMPUTER, INC., a general partnership California corporation By: /s/ James D. Mair By: /s/ Joseph A. Graziano -------------------------- -------------------------------- James D. Mair JOSEPH A. GRAZIANO Its: General Partner Its: Sr. Vice President and Chief Financial Officer ------------------------- ------------------------------- Date: 11-20-89 Date: 11-17-89 ------------------------ ------------------------------ AMENDMENT TO LEASE (Microwave Dish) THIS FIRST AMENDMENT TO LEASE ("Amendment") is made as of May 31, 1989, by and between MPJ, a California general partnership ("Landlord") and APPLE COMPUTER, INC., a California corporation ("Tenant"). RECITALS - -------- A. Landlord and Tenant entered into a certain lease (the "Lease"), dated for reference purposes June 1, 1988, of three (3) buildings located at 3565 Monroe Avenue, Santa Clara, California ("Monroe 1"), 3585 Monroe Avenue, Santa Clara, California ("Monroe 2"), and 3535 Monroe Avenue, Santa Clara, California ("Monroe 3"), (collectively, the "Premises"). B. Tenant has requested the right to install microwave antenna dishes on the roofs of the Premises. C. Landlord and Tenant have agreed to amend the Lease to provide for such microwave antenna dishes, in accordance with the terms and conditions of this Amendment. NOW THEREFORE, in consideration of the foregoing recitals and the mutual covenants provided herein, the parties hereto agree as follows: 1. Unless otherwise indicated, all capitalized terms shall have the meaning set forth in the Lease. 2. Landlord hereby grants to Tenant for the term of the Lease, as it may be extended, the right, at Tenant's cost, to install, maintain, operate, replace, repair and remove (collectively, "Construct" or the "Construction") microwave antenna dishes together with all cable, wiring, conduits and related equipment, (collectively, "Antenna"), on the roof ("Roof") of the Premises, such microwave antenna dishes to be located as shown on Exhibit A attached hereto and --------- incorporated herein. 3. Tenant agrees to indemnify and hold Landlord harmless from any claim resulting from property damage or personal injury arising in connection with the Construction and not covered by the insurance required to be carried by Tenant under the Lease. Tenant agrees to carry insurance to cover such liability and property damage. In no event, however, shall Tenant be liable for consequential damages or for any damage to the Roof or Premises or injury caused by any person or entity other 1 than Tenant, its agents, employees or contractors. 4. Tenant is not obligated to pay any additional rent in connection with the Antenna. 5. Landlord shall allow Tenant, at Tenant's cost, to hook-up the Antenna to the Premises' electrical system. 6. The Antenna shall at all times remain the property of Tenant and Tenant shall have the right to remove it at any time, subject to the terms and conditions of this Amendment. 7. Tenant shall remove the Antenna at the expiration or earlier termination of the Lease. 8. Tenant shall repair any damage caused to the Roof in connection with any such installation and removal to the condition of the Roof immediately prior to such damage, subject to damage caused by casualty or condemnation. 9. Tenant and its agents, employees and contractors shall have reasonable access to the Roof to carry out the Construction. 10. Except as otherwise provided herein, the Lease shall remain in full force and effect. The parties hereto have entered into this Amendment effective as of the date first above written: LANDLORD: TENANT: - -------- ------ MPJ APPLE COMPUTER, INC., a, California general partnership a California corporation By: /s/ James D. Mair By: /s/ Robert Hecox ------------------------- --------------------------- ROBERT A. HECOX Its: General Partner Its: Real Estate Manager ------------------------ -------------------------- 2 EXHIBIT B MICROWAVE SITE SURVEY MONICA SCHRADLE (408) 974-6304 - -------------------------------------------------------------------- NAME PHONE APPLE COMPUTER 3585 MONROE - ------------------------------------------------------ ADDRESS SANTA CLARA CA. - ---------------------------------- ---------------- CITY STATE ZIP DATE REQUESTED 4/19/89 AM 9:30 PM - ---------------- --------- -------------- COMPLETED 5/2/89 AM PM 1:00 - ---------------------------------------------- --- LEGEND (SHOW IN SKETCH) [SKETCH APPEARS HERE] [FLOOR PLAN OF MICROWAVE SITE SURVEY APPEARS HERE] ii [LETTERHEAD OF LANCE INDUSTRIES APPEARS HERE] EXHIBIT B The undisputed leader in MDS/ITFS reception dedicated to the manufacture of FINE QUALITY reception products for over 30 years. MICROWAVE 3 FT., 4 FT. OR 6 FT. DISH PARABOLICS - SECTION PARABOLICS FOR MDS 2150 TO 2162 MHZ OR NEW ITFS/MMDS - 2500-2690 MHZ ________________________________________________________________________________ 3 Ft., 4 Ft. or 6 Ft. DISH PARABOLICS Rugged dishes for Highest Gain - lowest wind loading. Vertical or Horizontal polarization with Dual Mode - Multi channel capability in 45 degrees mount position. Protected against corrosion. [PHOTO OF FEATURES: [PHOTO OF MODEL 28 . MDS to ITFS Multi Channel - simple dipole MODEL 72 MICROWAVE change MICROWAVE DISH PARABOLIC . Horizontal or Vertical Polarization DISH PARABOLIC APPEARS HERE] . Dual or Multi Channel Polarization - 45 APPEARS HERE] degrees mounting . 4 to 8 Channel Ready . Lowest Wind Loading . Electronically Welded Pressure Tested Dipole . All models include RG8 Cable with N Connector . Focus adjustable for gain control (except 6 Ft.) . Compatible with all down converters
SPECIFICATIONS MDS 2150-2162 MHz ITFS/MMDS 2500-2690 MHz ---------------------------------------------------- ---------------------------------------------------- DISH SIZE 3 Ft. 4 Ft. 6 Ft. DISH SIZE 3 Ft. 4 Ft. 6 Ft. ---------------------------------------------------- ---------------------------------------------------- MDS MODEL 2128 2132 2172 ITFS/MMDS MODEL 2528 2532 2572 ---------------------------------------------------- ---------------------------------------------------- FRONT-TO-BACK RATIO 25dB 30dB 36dB FRONT-TO-BACK RATIO 25dB 30dB 36dB ---------------------------------------------------- ---------------------------------------------------- IMPEDANCE 50 ohms 50 ohms 50 ohms IMPEDANCE 50 ohms 50 ohms 50 ohms ---------------------------------------------------- ---------------------------------------------------- BEAM WIDTH 10 degrees 10 degrees 8 degrees BEAM WIDTH 10 degrees 10 degrees 8 degrees ---------------------------------------------------- ----------------------------------------------------
________________________________________________________________________________ SECTION PARABOLICS FEATURES: The original high performance . Horizontal or Vertical MDS unit. Wire formed closed Polarization loop design for maximum . Dual or Multi Channel strength with lowest wind Polarization - 45 degrees loading. Mounts easily for mounting Vertical or Horizontal . Lowest Wind Loading polarization, and Dual Mode- . Electronically Welded 45 degrees Mounting provides Pressure Tested Dipole Multi channel operation. . Includes RG8 Cable with N [PHOTO OF Connector MODEL 24 Des. Pats. 2269009, 268343 . Focus adjustable for gain MICROWAVE Lic. under U.S. Pat. 4259143 control SECTION Other Pats. Pending . Compatible with all down PARABOLIC converters APPEARS HERE] SPECIFICATIONS
MDS 2150-2162 MHz ITFS/MMDS 2500-2690 MHz ---------------------------- ----------------------------- MDS MODEL 2124 ITFS/MMDS MODEL 2524 ---------------------------- ----------------------------- FRONT-TO-BACK RATIO 20dB FRONT-TO-BACK RATIO 20dB ---------------------------- ----------------------------- IMPEDANCE 50 ohms IMPEDANCE 50 ohms ---------------------------- ----------------------------- BEAM WIDTH 20 BEAM WIDTH 20 ---------------------------- -----------------------------
________________________________________________________________________________ Independent test range results: Gain figures, Polar Patterns - ------------------ and VSWRS available upon request. CONVERSION KIT All existing Lance MDS Units in field use will receive [CHART OF FREQUENCY/CHANNEL DESIGNATION APPEARS HERE] ITFS/MDS channels with a dipole conversion kit. Information avail- able on request. - ------------------ [LETTERHEAD OF LANCE INDUSTRIES APPEARS HERE] iii [LETTERHEAD OF LANCE INDUSTRIES APPEARS HERE] MICROWAVE SECTION PARABOLICS - CORNER REFLECTOR "THE ANGLE" FOR MDS 2150-2162 MHz OR NEW ITFS/MMDS 2500-2690 MHz - -------------------------------------------------------------------------------- SECTION PARABOLICS: Two models for Urban-Suburban Reception, with even lower wind loading but with the maximum reflector screen effect due to the unique [PHOTO OF MODEL 21 formed wire closed loop design. Easy Horizontal or MICROWAVE SECTION Vertical Mounting, with quick changeover to 45 PARABOLIC APPEARS degrees Dual Mode Mounting (requires only 2 bolts), HERE] for Multi Channel reception. SPECIFICATIONS
MDS 2150-2162 MHz ITFS/MMDS 2500-2690 MHz ------------------------------------- -------------------------------------- MDS MODEL 2121 ITFS/MMDS MODEL 2521 ------------------------------------- -------------------------------------- FRONT-TO-BACK RATIO 20dB FRONT-TO-BACK RATIO 20dB ------------------------------------- -------------------------------------- IMPEDANCE 50 ohms IMPEDANCE 50 ohms ------------------------------------- -------------------------------------- BEAM WIDTH 20 degrees BEAM WIDTH 20 degrees ------------------------------------- --------------------------------------
[PHOTO OF MODEL 18 Both units are built with the same attention to MICROWAVE SECTION detail as all other Lance MDS Units. Electronically PARABOLIC APPEARS welded pressure tested dipole. Compatability with HERE] all down converters. Simple Dipole change for MDS/ITFS operation, includes RG8 Cable with N Connector. SPECIFICATIONS
MDS 2150-2162 MHz ITFS/MMDS 2500-2690 MHz ------------------------------------- -------------------------------------- MDS MODEL 2118 ITFS/MMDS MODEL 2518 ------------------------------------- -------------------------------------- FRONT-TO-BACK RATIO 20dB FRONT-TO-BACK RATIO 20dB ------------------------------------- -------------------------------------- IMPEDANCE 50 ohms IMPEDANCE 50 ohms ------------------------------------- -------------------------------------- BEAM WIDTH 25 degrees BEAM WIDTH 25 degrees ------------------------------------- --------------------------------------
- -------------------------------------------------------------------------------- [PHOTO OF MODEL 12 "THE ANGLE" Precision Stamped Aluminum forms the MICROWAVE SECTION ANGLES' REFLECTOR for signal control - minimizes PARABOLIC APPEARS unwanted "bounce" signals (ghosting) and creates the HERE] ANGLES' High Front to Back Ratio. SPECIFICATIONS
MDS 2150-2162 MHz ITFS/MMDS 2500-2690 MHz ------------------------------------- -------------------------------------- MDS MODEL 2112 ITFS/MMDS MODEL 2512 ------------------------------------- -------------------------------------- FRONT-TO-BACK RATIO 20dB FRONT-TO-BACK RATIO 20dB ------------------------------------- -------------------------------------- IMPEDANCE 50 ohms IMPEDANCE 50 ohms ------------------------------------- -------------------------------------- BEAM WIDTH 35 degrees BEAM WIDTH 35 degrees ------------------------------------- --------------------------------------
- -------------------------------------------------------------------------------- Shipping Information MDS/ITFS Units - ------------------------------------------------------------------------------------------------------------------------------------ MDS MODEL 2112 2118 2121 2124 2128 - ------------------------------------------------------------------------------------------------------------------------------------ ITFS/MMDS MODEL 2512 2518 2521 2524 2528 - ------------------------------------------------------------------------------------------------------------------------------------ Weight, ea. 1.75 lbs. 3.5 lbs. 5 lbs. 7.5 lbs. 10.0 lbs. - ------------------------------------------------------------------------------------------------------------------------------------ Std. Pack 10 10 10 5 5 - ------------------------------------------------------------------------------------------------------------------------------------ Carton Size 21 1/2 x 19 x 13 1/2 21 1/2 x 19 x 13 1/2 35 x 18 3/4 x 16 35 x 27 x 12 3/4 38 x 37 1/8 x 13 3/4 - ------------------------------------------------------------------------------------------------------------------------------------ Shipping Wt., Ctn. 20 lbs. 38 lbs. 56 lbs. 43 lbs. 59 lbs. - ------------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------- MDS MODEL 2132 2172 - --------------------------------------------------------------- ITFS/MMDS MODEL 2532 2572 - --------------------------------------------------------------- Weight, ea. 16.0 lbs. 40.5 lbs. - --------------------------------------------------------------- Std. Pack 3 1 - --------------------------------------------------------------- Carton Size 50 3/4 x 48 x 16 74 x 38 x 13 3/4 - --------------------------------------------------------------- Shipping Wt., Ctn. 59 lbs. 52 lbs. - ---------------------------------------------------------------
Specifications subject to change without notice. Des. Pats. 269009, 268343 Lic. under U.S. Pat. 4259143 Other Pats. Pending [LETTERHEAD OF LANCE INDUSTRIES APPEARS HERE] iv Santa Clara Land Title Co. 9911628 Accommodation Only Accommodation No. Sp 9-1646-LZ Recorded at the request of SANTA CLARA LAND TITLE CO. RECORDING REQUESTED BY AND WHEN RECORDED RETURN TO: 8:00 NOV 14 1988 A.M. Wilson, Sonsini, Goodrich & Rosati Two Palo Alto Square, Suite 900 LAURIE KANE, Recorder Palo Alto, California 94306 Santa Clara County, Official Records Attn: Real Estate Department/SLW K754 Page 1507 - -------------------------------------------------------------------------------- MEMORANDUM OF LEASE ------------------- This Memorandum of Lease ("Memorandum") is entered into as of June 1, 1988, by and between MPJ, a California general partnership ("Landlord"), and APPLE COMPUTER, INC., a California corporation ("Tenant"). Landlord and Tenant hereby state the following for recording: 1. Landlord leases to Tenant, and Tenant hereby leases from Landlord, a portion of that certain real property located in the City of Santa Clara, County of Santa Clara, more particularly described on Exhibit A attached hereto upon the terms and conditions contained in that certain lease agreement dated for reference purposes June 1, 1988 between Landlord and Tenant ("Lease"). 2. The Lease shall be for a term beginning on the Commencement Date as that term is defined in the Lease and terminating December 31, 1992, subject to one option to renew for an additional three years pursuant to Section 17 of the Lease. 3. This Memorandum shall incorporate herein all of the terms and provisions of the Lease as though fully set forth herein. 4. This Memorandum is solely for recording purposes and shall not be construed to alter, modify, amend or supplement the Lease of which this is a memorandum. If there is any inconsistency between this Memorandum and the Lease, the Lease shall prevail. LANDLORD: TENANT: MPJ, a California APPLE COMPUTER, INC., general partnership a California corporation By: [SIGNATURE ILLEGIBLE] By: /s/ Robert A. Hecox --------------------------- --------------------------- Robert A. Hecox Its: General Partner Its: Real Estate Manager -------------------------- -------------------------- EXHIBIT "A" K754 Page 1508 The land referred to herein is described as follows: All that certain real property situate in the City of Santa Clara, County of Santa Clara, State of California, being a portion of that certain 24.740 acre parcel as shown on the certain Record of Survey filed in Book 447 of Maps at Page 33, Santa Clara County Records, described as follows: BEGINNING at the Northwest corner of said 24.740 acre parcel; thence from said POINT OF BEGINNING, along the Northerly line of said 24.740 acre parcel N. 89 degrees 25' 00" E. 995.17 ft.; thence leaving said Northerly line S. 0 degrees 10' 00" W. 705.02 ft. to a point in the Southerly line of said 24.740 acre parcel; thence along said Southerly line the following courses; S. 89 degrees 25' 00" W. 181.82 ft; South 2..00 ft.; and S. 89 degrees 25' 00" W. 760.70 ft.; thence leaving said Southerly line, along a tangent curve to the right with a radius of 50.00 ft., through a central angle of 90 degrees 34' 33" for an arc length of 79.04 ft. to a point in the Westerly line of said 24.740 acre parcel; thence along said Westerly line N. 0 degrees 00' 27" W. 656.49 ft. to the POINT OF BEGINNING. EXHIBIT "A" K754 Page 1509 STATE OF CALIFORNIA ) ) ss. COUNTY OF Santa Clara ) On this 8th day of November, in the year 1988, before me, the undersigned, a Notary Public in and for said State, personally appeared James D. Mair, personally known to me, to be the person who executed the within instrument as one of the 3 General partners, on behalf of MPJ, the partnership therein named, and acknowledged to me that the partnership executed it. WITNESS my hand and official seal. [SEAL APPEARS HERE] /s/ Linda M. Vincent _________________________ Notary Public STATE OF CALIFORNIA ) ) ss. COUNTY OF SANTA CLARA ) On this 12th day of September, in the year 1988, before me, the undersigned, a Notary Public in and for said State, personally appeared Robert Hecox , personally known to me, to be the person who executed the within instrument as Manager Real Estate, on behalf of Apple Computer, Inc., the corporation therein named, and acknowledged to me that such corporation executed the within instrument pursuant to its bylaws or to a resolution of its board of directors. WITNESS my hand and official seal. /s/ Marla K. Summers _________________________ Notary Public [SEAL APPEARS HERE] LEASE AGREEMENT --------------- This Lease is made and entered into as of June 1, 1988, by and between MPJ, a California general partnership (hereinafter "Landlord") and APPLE COMPUTER, INC., a California corporation (hereinafter "Tenant"). For and in consideration of the rental and of the covenants and agreements hereinafter set forth to be kept and performed by Tenant, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the premises hereinafter described for the term, at the rental and subject to and upon all of the terms, covenants and agreements hereinafter set forth. 1. PREMISES. -------- 1.1 Description. Landlord hereby leases to Tenant and Tenant hereby ----------- rents from Landlord those certain premises (the "Premises") located in the City of Santa Clara, County of Santa Clara, described and consisting of the following: A. Those certain buildings known as Building A, Building B and Building C as shown on the site plan (the "Site Plan") attached hereto as Exhibit "A", which buildings contain a total of approximately 222,800 sq. ft. of floor space with Building A containing approximately 56,448 sq. ft. of floor space, Building B containing approximately 77,416 sq. ft. of floor space, and Building C containing approximately 88,936 sq. ft. of floor space (collectively, the "Buildings"); and B. The improvements to be constructed in the Buildings by Tenant with the Improvement Allowance provided by Landlord pursuant to the provisions of Exhibit "B" attached hereto (the "Improvements"). The Premises are located on a larger parcel of real property (the "Parcel") on which are located a total of four (4) buildings together with driveways, parking areas and landscaped areas, all as shown on the Site Plan (the "Complex"). Landlord acknowledges that the calculation of the number of square feet stated in this Section 1.1 for each Building reflects a measurement of the respective Buildings from outside wall to outside wall including the inset area at each entryway and the inset area for glazing but excluding truck dock areas and roof overhangs. In the event that Tenant reasonably determines that the actual number of square feet contained in any of the Buildings is less than the number of square feet indicated in this Section 1.1, using the referenced method of measurement, Tenant shall be entitled to an equitable adjustment of the Base Monthly Rent stated in Section 3.1 at the rate of Seventy-Seven and One-Half Cents ($0.775) per square foot. 1.2 Work of Improvement. Landlord shall deliver the Premises to ------------------- Tenant in their existing condition, and broom-clean. Landlord shall not be required to remodel or otherwise construct any improvements or make any alterations to the Premises. Tenant acknowledges and understands that the Premises were previously occupied by another lessee. Any alterations, additions or improvements to the Premises required or desired by Tenant shall be constructed by Tenant at its sole cost and expense, subject to the provisions of Exhibit "B" and Section 7.3. 2. Term. ---- 2.l Term. The term of this Lease shall commence, as to each of the ---- Buildings, on the following respective Commencement Dates: Building Commencement Date -------- ----------------- A July 15, 1988 B October 1, 1988 C January 1, 1989 The term of this Lease shall end four (4) years following the Commencement Date for Building C, unless sooner terminated pursuant to the provisions of this Lease. 2.2 Occupancy. Landlord shall permit Tenant to enter each of the --------- Buildings on the following respective dates, for the purpose of commencing Tenant's desired remodeling: Building Occupancy Date -------- ----------------- A June 1, 1988 B August 1, 1988 C October 1, 1988 On the Occupancy Date for each Building, Landlord shall deliver possession of such Building to Tenant broom-clean, with all electrical and mechanical equipment and utility systems servicing such Building in good operating order, reasonable wear and tear -2- excepted. Within thirty (30) days after the Occupancy Date for each Building, Tenant shall prepare a "punchlist" of corrective work that must be done by Landlord to complete its delivery obligation. Tenant acknowledges that the existing lessee has the right to extend its scheduled vacancy date for Buildings B and C for up to twenty (20) days beyond the above-referenced Occupancy Dates for Buildings B and C. If the existing lessee exercises such right, then the Occupancy Date and Commencement Date for Building B and/or Building C, as the case may be, shall be extended one (1) day for each day that vacancy of the Building in question by the existing lessee is delayed beyond the above-referenced scheduled Occupancy Date for such Building. Landlord represents that it has negotiated and intends to execute with the existing lessee, either at or shortly after executing this Lease, an agreement terminating the tenancy of said lessee, which termination shall be effective on or before the Occupancy Dates stated in this Section 2.2, as such Occupancy Dates may be postponed pursuant to the following paragraph. If for any reason Landlord cannot deliver possession of each Building on the scheduled Occupancy Date for such Building, Land-lord shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Tenant hereunder, but in such case the Commencement Date for the Building in question shall be extended one (1) day for each day that Landlord's delivery of possession was delayed beyond the scheduled Occupancy Date, and, if such inability to deliver possession is the result of the refusal of the existing lessee to surrender possession of such Building(s), Landlord shall promptly exercise all rights and remedies available at law or in equity to evict such lessee. If the Occupancy Date has not occurred for any reason, other than the default of Tenant, within ninety (90) days of the scheduled Occupancy Date stated in Section 2.2, Tenant may terminate this Lease as to any such Building whose Occupancy Date -3- has been so delayed by written notice to Landlord, whereupon any monies previously paid by Tenant to Landlord with respect to such Building shall be reimbursed to Tenant, together with interest thereon from the date of termination until paid at the interest rate stated in Section 20.14. 3. RENT. ---- 3.1 Base Monthly Rent. ----------------- Tenant's occupancy of any portion of the Premises prior to the Commencement Date for such portion shall be subject to all of the provisions of this Lease, including, without limitation, the provisions of Paragraphs 10 and 11; provided, however, that Tenant shall not be obligated to pay any Base Monthly Rent or Additional Rent under this Lease until the Commencement Date for the Building in question. Tenant's obligation to pay rent for each Building shall commence on the Commencement Date for such Building, whether or not Tenant has completed its remodeling for such Building. Beginning on the Commencement Date for each Building and continuing through the term of this Lease, Tenant shall pay to Landlord as Base Monthly Rent for the Premises, the following respective sums for each Building, subject, however, to adjustment as provided in Sections 1.1, 3.2 and 3.3 below: Building Base Monthly Rent -------- ----------------- A _______________ B _______________ C _______________ Total =============== All Base Monthly Rent shall be paid in advance on the first day of each calendar month of the term of the Lease, without deduction, offset, prior notice or demand, in lawful money of the United States. If the Commencement Date is not the first day of a month, or if the Lease termination date is not the last day of the month, a prorated Base Monthly Rent shall be paid at the then current rate for the fractional month during which the Lease commences and/or terminates. -4- Within two (2) weeks following Tenant's execution of this lease, Tenant shall pay to Landlord the sum, as advance rent to be applied towards the Base Monthly Rents first accruing under this Lease. 3.2 Rental Adjustment. The Base Monthly Rent for each Building as ----------------- specified in Section 3.1 above shall be increased in accordance with the following formula to the extent Landlord disburses to Tenant the Improvement Allowance for such Building pursuant to Exhibit "B": for each dollar of Improvement Allowance disbursed up to and including Five Dollars ($5.00) per square foot, the Base Monthly Rent shall be increased by One Cent ($.0l) per square foot per month. For every dollar of Improvement Allowance over Five Dollars ($5.00) per square foot, the Base Monthly Rent shall be increased by One and Six-Tenths Cents ($.016) per square foot per month. For example, if Ten Dollars ($10.00) per square foot of Improvement Allowance is disbursed for Building A, the Base Monthly Rent for Building A shall be increased by the sum of Seven Thousand Three Hundred Thirty-Eight Dollars and Twenty-Four cents ($7,338.24). 3.3 Rental During Option Term. If Tenant exercises the option to ------------------------- extend the Lease Term pursuant to Section 17 below, then commencing on the first day of the Option Term, the Base Monthly Rent shall be increased to a sum equal to the total of: (a Dollars plus (b) a sum equal to One Hundred Seventy-Two fraction, the numerator of which is the New Index and the denominator of which is the Initial Index; provided, however, that in no event shall the monthly installment of Base Monthly Rent during the Option Term be more than Monthly Rent during the Option Term be less than -5- ____________________________________________________________________ plus one For purposes of adjusting the Base Monthly Rent as provided in this Lease, the following definitions shall apply: (i) "Index" means the Consumer Price Index for All Urban Consumers (all items) as published by United States Department of Labor, Bureau of Labor Statistics for the San Francisco/Oakland/San Jose Metropolitan Area (1982-1984=100 Base); (ii) "Initial Index" means the Index last published prior to the Building A Commencement Date of this Lease; and (iii) "New Index" means the Index last published prior to the first day of the Option Term. If the Index is changed or the base year is altered from that used as of the Commencement Date of this Lease, the Index shall be converted in accordance with the conversion factor published by United States Department of Labor, Bureau of Labor Statistics, to obtain the same results which would have been obtained had the Index or the base year not been changed. If no conversion factor is available, or if the Index is otherwise changed, revised or discontinued for any reason, there shall be substituted in lieu thereof, and the term Index shall thereafter refer to the most nearly comparable official price index of the United States Government in order to obtain substantially the same result for any adjustment required by this Lease as would have been obtained had the Index not been changed, revised or discontinued. 3.4 Additional Rent. Commencing on the Commencement Date for each --------------- Building, and continuing throughout the Lease term, Tenant shall pay within thirty (30) days of receipt of billing therefor, as additional rent (i) all utilities as required by Section 6.1, (ii) Tenant's Pro Rata Share of real property taxes as -6- required by Section 4.1, (iii) Tenant's Pro Rata Share of the property insurance premiums as required by Section 11.2, (iv) Tenant's Pro Rata Share of Outside Area Expenses as required by Section 18, and (v) all other sums and charges payable by Tenant pursuant to the terms of this Lease (hereinafter collectively referred to as "Additional Rent"). The Additional Rent shall be paid in addition to the Base Monthly Rent. In the event of nonpayment by Tenant of the Additional Rent, Landlord shall have all the rights and remedies with respect thereto as Landlord has for the nonpayment of the Base Monthly Rent. As used in this Lease, and provided that the Commencement Date for each Building occurs in the sequence stated in Section 2.1, the term "Tenant's Pro Rata Share" shall mean the following fractions during the following time periods:
TIME PERIOD TENANT'S PRO RATA SHARE - ----------------------------------- ----------------------- From the Building A Commencement Date until the 56,448 ------- Building B Commencement Date 275,264 From the Building B Commencement Date until the Building C 133,864 ------- Commencement Date 275,264 After the Building C Commencement 222,800 ------- Date 275,264
Landlord acknowledges that the calculation of the number of square feet comprising the four (4) buildings in the Complex reflected in this Section 3.4 is consistent with the method stated in Section 1.1, and, if Tenant reasonably determines that such calculation is inaccurate, Tenant shall be entitled to an equitable adjustment of Tenant's Pro Rata Share. 3.5 Late Charges. Tenant acknowledges that late payment by Tenant to ------------ Landlord of the Base Monthly Rent and other sums due hereunder may cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by the terms of any mortgage or deed of trust covering the Premises. Accordingly, in the event Tenant fails to -7- pay any installment of Base Monthly Rent and/or other sums due hereunder within ten (10) days after Tenant receives written notice that said rent or other sum has not been paid when due, Tenant shall pay to Landlord, as Additional Rent, a late charge equal to six percent (6%) of such overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the cost Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of its other rights and remedies granted under this Lease. 4. TAXATION. -------- 4.1 Real Property Taxes. Tenant shall pay to Landlord, as additional ------------------- rent, Tenant's Pro Rata Share of all real property taxes which, during the term of this Lease, are levied, assessed or imposed upon or against the Premises, the Parcel and the Complex. Tenant shall pay its Pro Rata Share of such taxes to Landlord on or before the later of (a) ten days after receipt of billing (which shall include a copy of the tax collector's statement) or (b) ten days prior to the delinquency date of such taxes. In the event any such real property taxes cover any period of time prior to commencement or after the expiration of the term of this Lease, Tenant's share of such taxes shall be equitably prorated to cover only the period of time within the fiscal tax year during which the Lease is in effect. As used in this Lease, the term "real property tax" shall include any form of assessment, levy, penalty or tax (other than inheritance, estate, net income or franchise taxes) imposed by any authority having the direct or indirect power to tax, including any city, county, state or federal government or any school, agricultural, lighting, drainage or other improvement district thereof, including, without limitation, any tax: A. Upon, allocable to, or measured by the Premises or the Parcel or the rental payable hereunder, including without limitation, any gross income tax or excise tax levied by the state, -8- any political subdivision thereof, city or federal government with respect to the receipt of such rental; or B. Upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof; or C. Upon or measured by the value of Tenant's personal property, equipment or fixtures located in the premises; or D. Upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. E. Notwithstanding the foregoing, in the event Landlord sells or otherwise transfers the Premises or any portion thereof, Tenant shall have no obligation, during the initial term of the Lease, to pay that portion, as reasonably determined by Landlord based upon the county tax assessor's tax statement for the Premises, of the real property taxes attributable to a reassessment following such sale. This Section 4.1(E) shall be inapplicable during the Option Term. 4.2 Personal Property Taxes. Tenant shall pay prior to delinquency ----------------------- all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Tenant contained in the Premises or elsewhere. When possible, Tenant shall cause said trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Landlord. If any of Tenant's personal property shall be assessed with landlord's real property, Tenant shall pay to Landlord the taxes attributable to Tenant on or before the later of (a) ten (10) days after receipt of a written statement setting forth the taxes applicable to Tenant's property, which statement shall include a copy of the tax collector's statement, or (b) ten (10) days prior to delinquency date of said taxes. -9- 4.3 Assessments. To the best of Landlord's knowledge, no special ----------- assessments in addition to those shown on the property tax bill for the Premises for the 1987-88 fiscal year will be imposed on the Premises during the term of this Lease, except as disclosed in writing to Tenant. If any assessments are levied against the Premises after the Commencement Date for any of the Buildings, Landlord may elect to either pay the assessment in full or allow the assessment to go to bond. If Landlord pays the assessment in full, Tenant shall pay to Landlord each time payment of real property taxes is made, a sum equal to that which would have been payable (as both principal and interest) had Landlord allowed the assessment to go to bond. 4.4 Right to Contest. If Landlord receives any notice of assessment ----------------- or reassessment, or notice of any imposition of new real property taxes, Landlord shall provide Tenant with a copy of such notice within fifteen (15) days after Landlord's receipt thereof. In the event Tenant desires in good faith to contest or otherwise review by appropriate legal or administrative proceedings the imposition of any such real property tax, Tenant shall, at least ten (10) days prior to the delinquency of such real property tax, give Landlord written notice of its intention to do so. Tenant may withhold payment of the real property tax being contested if, but only if, both (i) non-payment is permitted during the pendency of such proceedings without the foreclosure of any tax lien or the imposition of any fine or penalty, and (ii) Tenant further furnishes Landlord with a bond satisfactory to Landlord sufficient to protect Landlord's interest in the Premises. Any such contest shall be prosecuted to completion (whether or not this Lease shall have expired or terminated in the interim) and shall be conducted without delay and solely at Tenant's expense. Tenant shall protect and indemnify Landlord against any and all expenses or damages resulting from such contest or other proceeding. At the request of Tenant, Landlord shall join in any contest or other proceedings which Tenant may desire to bring pursuant to this Section. Tenant shall pay all of Landlord's expenses arising out -10- of such joinder. Within ten (10) days after the final determination of the amount due from Tenant with respect to the real property tax contested, Tenant shall pay the amount so determined to be due, together with all costs, expenses and interest, whether or not this Lease shall have then expired or terminated. 5. USE. --- 5.1 Use. The Premises shall be used and occupied by Tenant for only --- the following purposes and for no other purpose whatsoever without obtaining the prior written consent of Landlord: office, light warehouse, distribution, engineering, research and development, product testing, incidental training and any other legal uses for Tenant's business as the same may exist from time to time. This lease shall be subject to all applicable zoning ordinances and to any municipal, county and state laws and regulations governing and regulating the use of the Premises. Tenant acknowledges that neither Landlord nor Landlord's agent has made any representation or warranty as to the suitability of the Premises for the conduct of Tenant's business. Notwithstanding the foregoing, Landlord represents that it has no knowledge of any laws, statutes, ordinances, or governmental rules, regulations or requirements ("Laws") or of any covenants, conditions, restrictions or encumbrances ("CC&Rs") which would currently prevent or substantially interfere with the Premises being used for the above-described uses. Landlord acknowledges that the Premises are currently in the MP (Planned Industrial) zoning classification established by the City of Santa Clara, and that the uses that may be made of the Premises pursuant to this Section are permitted to be made under zoning regulations which govern the use of the Premises. 5.2 Uses Prohibited. --------------- A. Tenant shall not do or permit anything to be done in or about the Premises which will increase the existing rate of insurance upon the Premises (unless Tenant shall pay any increased premium as a result of such use or acts) or cause the -11- cancellation of any insurance policy covering the premises or the Parcel, nor shall Tenant sell or permit to be kept, used or sold in or upon the Premises or the Outside Area, any articles which may be prohibited by a standard form policy of fire insurance. B. Tenant shall not do or permit anything to be done in or upon the Premises or the Outside Area, which will in any way obstruct or interfere with the rights of other tenants or occupants of the Parcel or injure or annoy them or use or allow the Premises to be used for any unlawful or objectionable purpose nor shall Tenant cause, maintain or permit any nuisance in or upon the Premises, or the Outside Area. Tenant shall not commit or suffer to be committed any waste in or upon the Premises or the Outside Area and Tenant shall keep the Premises in a clean, attractive condition, free of any objectionable noises, odors or dust. C. Tenant shall not use the Premises or the Outside Area, or permit anything to be in or about the Premises or Outside Area which will in any way conflict with any Laws, statute, zoning restriction, ordinance, governmental rule, regulation, or requirements now in force or which may hereafter be enacted or promulgated. Tenant shall at its sole cost and expense promptly comply with all laws, statutes, ordinances and governmental rules, regulations and requirements now in force or which may hereafter be in force and with requirements of any board or fire underwriters or other similar body ("Underwriter's Requirement") now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord is a party thereto or not, that Tenant has violated any law, statute, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between Landlord and Tenant. 6. UTILITIES AND WASTE DISPOSAL. ---------------------------- 6.1 Utilities. Commencing on the Commencement Date for each --------- Building, Tenant shall pay as additional rent, prior to delinquency, for all water, gas, heat, light, power, telephone, -12- sewage, air conditioning and ventilating, scavenger, janitorial, and all other materials and utilities supplied to the Premises and all taxes and surcharges thereon. 6.2 Waste Disposal. Tenant shall store its waste either inside the -------------- Premises or in its own dumpsters located within outside trash enclosures located in the Outside Area. 6.3 Interference with Use of the Premises. In the event of a ------------------------------------- material interference with Tenant's use of the leased Premises as a consequence of the cessation of utility service caused by the negligence or willful misconduct of Landlord or its agents, contractors, employees or invitees, Tenant shall be entitled to an abatement of Base Monthly Rent to the extent of the interference with Tenant's use of the leased Premises, if such cessation of utility service and consequent material interference persists for a continuous period of two (2) business days or more. Any abatement of Base Monthly Rent shall commence with the first business day after the beginning of the cessation of utility service and shall continue until that date on which the utility service is restored. 7. MAINTENANCE AND REPAIRS, ALTERATIONS AND ADDITIONS. --------------------------------------------------- 7.1 Landlord's Obligations. Subject to the provisions of Section 12 ---------------------- and except for damage caused by any negligent or intentional act or omission of Tenant and Tenant's agents, employees or invitees, which damage is not covered by the type of insurance to be maintained pursuant to Section 11.2 hereof, Landlord, at Landlord's expense, shall keep in good order, condition and repair the foundations, exterior walls and exterior roofs (including roof membranes) of the Premises. Landlord shall not, however, be obligated to paint such exterior, nor shall Landlord be required to maintain the interior surface of exterior walls, ceilings or doors. Landlord shall have no obligation to make repairs under this Section 7.1 until a reasonable time after receipt of written notice of the need for such repairs. Tenant expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Tenant the right to make repairs at Landlord's expense or to terminate this Lease because of -13- Landlord's failure to keep the Premises in good order, condition and repair. If, within thirty (30) days after notice from Tenant, Landlord fails to commence making repairs which are the obligation of Landlord under this Section 7.1, Tenant shall have the right to make such repairs and charge Landlord for the reasonable cost thereof. In such event, Landlord shall reimburse Tenant for the cost of such repairs within thirty (30) days after receipt of billing from Tenant. 7.2 Tenant's Obligations. -------------------- A. Subject to the provisions of Sections 12 and 7.1, Tenant, at Tenant's expense, shall maintain in good order, condition and repair the Premises and every part thereof, including but not limited to floors, ceilings, windows, doors, skylights, interior walls, and the interior surfaces of the exterior walls, plumbing, heating, air conditioning and ventilating equipment, electrical and lighting facilities and equipment to the Premises including circuit breakers and exterior lighting attached to the Premises. Said maintenance shall include, without limitation, a periodic agreement with a reputable and licensed heating and air conditioning service company which provides for service to the HVAC equipment at least as often as every ninety (90) days if Tenant's use of the Premises is limited to normal business hours (8:00 a.m. to 6:00 p.m.); if Tenant's use extends beyond normal business hours, such service shall be as often as may be required by Landlord. If Tenant does not provide Landlord with a copy of any such required maintenance contract within thirty (30) days after written request from Landlord, Landlord may elect, at its option, to keep and maintain the heating and air conditioning systems in the Premises, and in such event Tenant shall pay to Landlord upon demand the full cost of such maintenance and repairs to such systems. B. All glass, both interior and exterior, is at the sole risk of Tenant, and any broken glass shall promptly be replaced by Tenant at Tenant's expense with glass of the same kind, size and quality according to the current local code. -14- C. In the event the Premises are damaged due to an attempted burglary or forcible entry into the Premises, Tenant shall be responsible for any ensuing damage to the Premises. D. Upon the expiration or earlier termination for this Lease, Tenant shall surrender the Premises in the same condition as received, broom clean, ordinary wear and tear, damage by fire, earthquake, acts of God, or condemnation alone excepted. Tenant, at its sole cost and expense, agrees to repair any damage to the Premises caused by or in connection with the removal of any articles of personal property, business or trade fixtures, machinery, equipment or furniture, including without limitation thereto, repairing the floor and patching and painting the walls where required by Landlord to Landlord's reasonable satisfaction. Tenant shall indemnify Landlord against any loss or liability resulting from delay by Tenant in so surrendering the Premises, including without limitation, any claims made by any succeeding Tenant founded on such delay. E. In the event Tenant fails to perform Tenant's obligations under this Section 7, Landlord shall give Tenant written notice to do such acts as are reasonably required to maintain the Premises. If Tenant fails to do the work and diligently prosecute it to completion, then Landlord shall have the right (but not the obligation) to do such acts and expend such funds at the expense of Tenant as are reasonably required to perform such work. Any amount so expended by Landlord shall be paid by Tenant within thirty (30) days after demand with interest at ten percent (10%) per annum form the date of such work. Landlord shall have no liability to Tenant for any damage, inconvenience, or interference with the use of the Premises as a result of performing any such work. F. Tenant shall have the benefit of all warranties available to Landlord which would reduce the cost of performing the obligations of Tenant pursuant to Section 7.2. Landlord warrants to Tenant that all of the improvements existing on the Premises as of the Occupancy Date shall have been constructed in good and -15- workmanlike manner in accordance with all Laws, Underwriter's Requirements and the plans and specifications therefor. Tenant shall not be responsible for the cost of maintenance or repair to the Premises or any portion thereof to the extent such maintenance or repair is necessary as a result of the negligent act or omission of Landlord or its agents, employees, contractors or invitees. G. If Tenant becomes obligated pursuant to Section 7.2(a) to perform any item of repair to the plumbing, heating, air conditioning and ventilating equipment, or electrical and lighting facilities and equipment, which would, under generally accepted accounting principles, properly be considered a capital improvement to the Premises, the cost of which exceeds Twenty-Five Thousand Dollars ($25,000), then Landlord and Tenant shall share the initial cost of such capital improvement as follows: (i) Tenant shall pay the first Twenty-Five Thousand Dollars ($25,000) of such initial cost; (ii) Tenant shall pay a share of the remaining cost, in the same proportion that the number of years remaining in the Lease term bears to ten (10) years, determined by amortizing such cost over ten (10) years on a straight line basis; and (iii) Landlord shall pay, within sixty (60) days of written notice from Tenant setting forth the amount to be paid by Landlord, the remaining share of the initial cost. In the event that Tenant exercises its option to extend the term of this Lease pursuant to Section 17, Tenant will again pay to Landlord, within sixty (60) days of the commencement of the Option Term, a share of the cost of such capital improvement in excess of Twenty-Five Thousand Dollars ($25,000), in the proportion that the number of years then remaining in the Lease term bears to ten (10) years. 7.3 Leasehold Improvements. ----------------------- A. Tenant shall not construct any leasehold improvements or otherwise alter the leased Premises without Landlord's prior written approval of the plans and specifications therefor, which approval shall not be unreasonably withheld; provided, however that Tenant shall have the right to make interior -16- nonstructural alterations to the Premises which do not exceed Twenty-Five Thousand Dollars ($25,000) in cost, without obtaining Landlord's prior written approval. All such leasehold improvements shall be installed by Tenant at Tenant's expense by a licensed contractor in compliance with the approved plans and specifications therefor and in strict accordance with all Laws. All such construction shall be done in a good and workmanlike manner using new materials of good quality. Tenant shall not commence construction of any leasehold improvements until (1) all required governmental approvals and permits shall have been obtained; (2) all requirements regarding insurance imposed by this Lease have been satisfied; and (3) Tenant shall have given Landlord at least five (5) days prior written notice of its intention to commence such construction. All leasehold improvements constructed by Tenant (except those constructed with the Improvement Allowance pursuant to Exhibit B") shall remain the property of Tenant during the Lease term but shall not be damaged, altered or removed from the Premises. At the expiration or sooner termination of the Lease term, all leasehold improvements shall be surrendered to Landlord as a part of the realty and shall then become Landlord's property, and Landlord shall have no obligation to reimburse Tenant for all or any portion for the value or cost thereof; however, Landlord may, at its option, require Tenant to remove any leasehold improvements in which case Tenant shall so remove such leasehold improvements prior to the expiration or sooner termination of the Lease term. Upon request, within thirty (30) days of Tenant's application for consent to such leasehold improvements or no later than one hundred twenty (120) days before the expiration of the Lease term, Landlord shall advise Tenant in writing whether it reserves the right to require Tenant to remove any leasehold improvements from the Premises upon termination of the Lease. In the event that Landlord does not so designate any such leasehold improvements within the time stated, Tenant shall not be required to remove such leasehold improvements from the Premises. Notwithstanding the -17- provisions of this Section 7.3(A), those leasehold improvements installed in the Premises at Tenant's expense (except those constructed with the Improvement Allowance pursuant to Exhibit "B" or which replace leasehold improvements existing as of the Occupancy Date) shall remain the property of Tenant following the expiration or sooner termination of the Lease Term, and Tenant shall not be required to surrender such leasehold improvements to Landlord. Within ten (10) business days after demand therefor from Tenant, Landlord shall execute and deliver a lien waiver or other document in form customarily required by any supplier, lessor or lender in connection with the installation in the Premises of Tenant's personal property or trade fixtures, pursuant to which Landlord shall waive any right it may have or acquire with respect to such property. Landlord reserves the right to approve the form of any lien waiver it is required to execute and to make reasonable modifications to any such form. B. Alterations Required by Law. Tenant shall, at its sole --------------------------- cost, make any alteration, addition or change of any sort, whether structural or otherwise, to the Premises that is required by Law because of (1) Tenant's use or change of use of the Premises, (2) Tenant's application for a new permit or governmental approval, or (3) Tenant's construction or installation of any leasehold improvements or trade fixtures. C. In the event Tenant is required by any Law or Underwriter's Requirement to make any capital improvement to the Premises, Tenant shall have the right to contest or otherwise review by appropriate legal or administrative proceedings the application of such Law or Underwriter's Requirement. If Tenant desires to so contest or cause the review of such Law or Underwriter's Requirement, Tenant shall give Landlord written notice of its intention to do so and may conduct such contest or other review so long as it pays all costs, and compliance therewith may be held in abeyance pending completion of such proceedings. If required by Landlord, Tenant shall obtain and furnish Landlord with -18- an appropriate bond or other security sufficient to protect Landlord from Tenant's failure to comply with such Law or Underwriter's Requirement during the pendency of such proceedings. Tenant shall protect and indemnify Landlord against any and all expenses or damages resulting from such contest or other proceeding. D. If any capital improvement is required to be made to the Premises in order to comply with any Law or Underwriter's Requirement and if Tenant is not obligated to make such capital improvement pursuant to Section 7.3(B), then the following shall apply: (i) Landlord shall construct such capital improvement at its sole cost and expense in accordance with the applicable Law or Underwriter's Requirement. (ii) All reasonable costs paid by Landlord to construct such required capital improvement (including financing costs) shall be amortized over the useful life of such improvement with interest on the unamortized balance at the then prevailing market rate Landlord would pay if it borrowed funds to permanently finance such improvement from an institutional lender following completion. Landlord shall notify Tenant of its determination of the appropriate amortization schedule based upon the foregoing and the monthly amortization payment that must be made to amortize such costs, and shall provide Tenant with the information upon which such determination is made. Such determination shall be subject to the approval of Tenant. As Additional Rent, Tenant shall pay an amount equal to such monthly amortization payment for each month after such capital improvement is completed until the expiration of the term of -19- this Lease. The Additional Rent described by this Section shall not be subject to the adjustment required to be made to the Base Monthly Rent payable during the Option Term pursuant to Section 3.3 hereof. 8. ENTRY BY LANDLORD. Landlord and Landlord's agent shall have the right ----------------- at reasonable times and upon reasonable written notice to Tenant, of not less then twenty-four (24) hours, except in an emergency, and subject to Tenant's security requirements, to enter the Premises to inspect the same or to maintain and repair, make alterations or additions to the Premises or any portion thereof, to the extent permitted or required by this Lease, or to show the Premises to prospective purchasers and lenders or, during the last six (6) months of the Lease term, to prospective tenants. Landlord may, at any time, place on or about the Premises any ordinary "For Sale" signs; Landlord may at any time during the last ninety (90) days of the term of the Lease place on or about the Premises any ordinary "For Lease" signs. Tenant hereby waives claim for abatement of rent or for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby, provided that Landlord shall have used all reasonable efforts to minimize such injury, inconvenience, interference or loss. 9. LIENS. Tenant shall keep the Premises and the Parcel free from any ----- liens arising out for work performed, materials furnished or obligations incurred by Tenant and shall indemnify, hold harmless and defend Landlord from any liens and encumbrances arising out of any work performed or materials furnished by or at the direction of Tenant. In the event that Tenant shall not, within thirty (30) days following receipt of notice of the imposition of any such liens, cause such lien to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but not the obligation, to cause the same to be released by -20- such means as it shall deem proper, including payment of the claim giving rise to such lien. All such sums paid by Landlord and all expenses incurred by it in connection therewith including attorneys' fees and costs shall be payable to Landlord by Tenant within thirty (30) days of demand with interest at the rate of ten percent (10%) per annum. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law, or which Landlord shall deem proper, for the protection of Landlord and the Premises, and any other party having an interest therein, from mechanics' and material persons' liens and Tenant shall give to Landlord at least ten (10) business days prior written notice of the expected date of commencement of any work relating to alterations or additions to the Premises. 10. INDEMNITY. --------- 10.1 Indemnity. Tenant shall indemnify and hold Landlord harmless --------- from and against any and all claims of liability for any injury or damage to any person or property arising from Tenant's use of the Premises, or from the conduct of Tenant's business, or from any activity, work or thing done, permitted or suffered by Tenant in or upon the Premises or the Outside Area. Subject to the provisions of Section 11.3, entitled Waiver of Subrogation, Tenant shall further indemnify and hold Landlord harmless from and against any and all claims arising from any breach or default in the performance of any obligation on Tenant's part to be performed under this Lease, or arising from any negligence of Tenant or Tenant's agents, contractors or employees, and from and against all costs, attorneys' fees, expenses and liabilities incurred in the defense of any such claim, or any action or proceeding brought thereon. In the event any action or proceeding is brought against Landlord by reason of such claim, Tenant upon notice from Landlord shall defend same at Tenant's expense. Notwithstanding anything to the contrary in the Lease, Tenant shall neither release Landlord from, nor indemnify Landlord with respect to: (i) the negligence or willful misconduct of Landlord, -21- the other occupants of the Complex, or their respective agents, employees, contractors or invitees; or (ii) a breach of Landlord's obligations or representations under this Lease. Landlord shall indemnify and hold harmless Tenant from all damages, liabilities, judgments, actions, attorneys' fees, consultants' fees, costs and expenses arising from the negligence or willful misconduct of Landlord or its employees, agents contractors or invitees, or the breach of Landlord's obligations or representations under this Lease. 10.2 Exemption of Landlord from Liability. Landlord shall not be ------------------------------------ liable for injury to Tenant's business or loss of income therefrom or for damage which may be sustained by the person, goods, wares, merchandise or property of Tenant, its employees, invitees, customers, agents or contractors or any other person in or about the Premises, caused by or resulting from fire, steam, electricity, gas, water or rain, which may leak or flow from or into any part of the Premises, or from the breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures of the same, whether the said damage or injury results from conditions arising upon the Premises or from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Tenant. Landlord shall not be liable for any damages arising from any act or neglect of any other tenant, if any, of the Parcel. The provisions of this Paragraph 10.2 shall not apply to or in the event of any damage or injury caused by the willful misconduct or negligence of Landlord, its agents or employees. 11. INSURANCE. --------- 11.1 Liability Insurance. Tenant shall, at its own expense, maintain ------------------- in full force and effect during the Lease Term the following insurance: A. Tenant shall maintain a policy or policies of comprehensive general liability insurance, including fire and property damage carried with a company or companies satisfactory to -22- Landlord, which will insure Tenant and Landlord (and such others as are designated by Landlord) against liability for personal injury, bodily injury, death, and damage to property occurring in or about, or resulting from any occurrence in or about, the Premises with combined single limit coverage of not less than Three Million Dollars ($3,000,000.00). Such comprehensive general liability insurance shall be extended to include "blanket contractual liability" endorsement insuring Tenant's performance of Tenant's obligation to indemnify Landlord contained in Section 10.1 and all of the other broadened liability features normally contained in an extended liability endorsement. If Landlord's lender, insurance advisor or counsel reasonably determines at any time that the amount of such coverage is not adequate and provided such increase is reasonably approved by Tenant, Tenant shall increase such coverage to such amount as Landlord's lender, insurance advisor or counsel reasonably deems adequate. The limits of such insurance shall not limit the liability of Tenant. Tenant shall deliver to Landlord certificates of insurance evidencing the existence and amounts of such insurance naming Landlord as an additional insured. In the event Tenant fails to procure and maintain such insurance, Landlord may (but shall not be required to) procure same at Tenant's expense after ten (10) days prior written notice. No such policy shall be cancellable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Landlord by the insurer. All such policies shall be written as primary policies, not contributing with and not in excess of coverage which Landlord may carry. Tenant shall, within twenty (20) days prior to the expiration of such policies, furnish Landlord with renewals or binders or Landlord may order such insurance and charge the cost to Tenant, which amount shall be payable by Tenant upon demand. Tenant shall have the right to provide such insurance coverage pursuant to blanket policies obtained by Tenant provided such blanket policies expressly afford coverage to the Premises and to Landlord as required by this Lease. -23- 11.2 Property Insurance. Landlord shall, at Tenant's expense, procure ------------------ and maintain at all times during the term of this Lease a policy or policies of insurance covering loss or damage to the Premises in the amount of the full replacement value thereof and loss of rental income (for a maximum of twelve (12) months) thereof, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, sprinkler leakage and special extended peril (all-risk) (and, if required by Landlord's lender, flood and earthquake). Landlord shall not be required to cause such insurance to cover any of Tenant's personal property, inventory, trade fixtures or any modifications, alterations, or improvements made or constructed by Tenant to or within the Premises. During the term of this Lease, Tenant shall pay to Landlord, as additional rent, the amount of the premium for the insurance required under this Section 11.2 within ten (10) days after receipt by Tenant of a copy of the premium statement or other reasonably satisfactory evidence of the amount due, which shall include the method of calculation of Tenant's share thereof if the insurance covers improvements other than the Premises. If the term of this Lease does not expire concurrently with the expiration of the period covered by the insurance Tenant's liability for such premium shall be prorated on an annual basis. Tenant shall not be obligated to pay the cost of earthquake insurance to the extent it exceeds a commercially reasonable rate. If the cost of earthquake insurance exceeds a commercially reasonable rate, Tenant shall nonetheless continue to pay an amount equal to a commercially reasonable rate for such earthquake insurance so long as such insurance is carried by Landlord. For purposes hereof, a "commercially reasonable rate" for earthquake insurance shall mean any rate that is within the range of the then current cost of earthquake coverage which is then being paid by Prime Owners (defined below) of industrial buildings in Santa Clara County containing more than 50,000 square feet that were built after 1976 or which is being reimbursed or paid by tenants occupying, under triple net leases, such buildings. Prime Owners -24- shall be any entity whose individual real property holdings exceed Twenty-Five Million Dollars ($25,000,000) in fair market value who fit into the following categories: (i) institutional investors such as pension funds, insurance companies, and syndications where partnership interests were offered pursuant to a registered public offering; and (ii) industrial developers and their affiliated partnerships (e.g., Lincoln Property Company, Trammel Crow, Peery/Arrillaga, the Koll Company). Notwithstanding the foregoing: (i) in the event that it is not the prevailing practice, because of the excessive cost of earthquake insurance coverage, for Prime Owners of industrial buildings in Santa Clara County containing more than 50,000 square feet that were built after 1976 to pay, or tenants occupying such buildings under triple net leases to reimburse, the cost of earthquake insurance coverage, the rate paid by the remaining Prime Owners or reimbursed by their tenants shall not be deemed to establish a commercially reasonable rate, and (ii) an annual rate of earthquake insurance coverage of Ten Dollars ($10) per One Thousand Dollars ($1,000) of replacement cost is acknowledged by the parties to be at the high end of the range of commercially reasonable rates for earthquake insurance as of the date of this Lease. Landlord shall maintain, at its sole cost and expense, a policy or policies of comprehensive general liability insurance insuring Landlord (and such others as are designated by Landlord) against liability for personal injury, bodily injury, death, and damage to property occurring or resulting from an occurrence in, on or about the Premises, with combined single limit coverage of not less than Three Million Dollars ($3,000,000), or such greater coverage as Landlord may from time to time determine is reasonably necessary for its protection. 11.3 Waiver of Subrogation. Landlord and Tenant each hereby waive any --------------------- and all rights of recovery against the other, and against the officers, partners, employees, agents and representatives of the other, on account of loss or damage to such waiving party's property or the property of others under its control to the -25- extent that such injury, loss or damage is insured against under any insurance policy in force at the time of such loss or damage. Landlord and Tenant agree to notify the insurance carrier or carriers under any such policy that the foregoing mutual waiver of subrogation is contained in this Lease. 12. DAMAGE OR DESTRUCTION. --------------------- A. If any one or more of the Buildings that are part of the Premises are damaged by any peril, then Landlord shall restore the damage to such Building(s), except to the extent that this Lease is terminated either in its entirety or in part by Landlord pursuant to Section 12B hereof or by Tenant pursuant to Section 12C hereof. If this Lease is not so terminated either in its entirety or in part, all proceeds of the insurance carried pursuant to Section 11.2 shall be paid to Landlord and shall be used for the restoration of the damage. The party who has obtained and is then carrying such insurance shall be responsible for paying any "deductible" amount that is excluded from coverage. Upon receipt of such insurance proceeds and the issuance of all necessary governmental approvals, Landlord shall commence and diligently prosecute to completion the restoration of the Building(s) to substantially the same condition existing immediately prior to such damage. However, if Landlord commences such restoration but has not substantially completed such restoration within two hundred forty (240) days after the date of such damage, then Tenant shall have the option to terminate this Lease as to the Building(s) so damaged on the following terms: (i) within thirty (30) days after the expiration of such two hundred forty (240) day period, Tenant shall notify Landlord as to whether or not it elects to exercise its option to terminate this Lease; and (ii) if Tenant makes such election and the restoration is not substantially completed within thirty (30) days after Landlord's receipt of such notice of election from Tenant, then this Lease shall terminate as to the Building(s) so damaged and not restored. B. Landlord shall have the following options to terminate this Lease as to the Building(s) damaged, which may be exer- -26- cised only by delivery to Tenant of a written notice of election to terminate within thirty (30) days after the date the damage occurs: (1) In the event any one of the Buildings is damaged by a peril that is not covered by the insurance carried pursuant to Section 11.2, and the cost to restore the damage exceeds five percent (5%) of the then replacement cost of the Building so damaged, Landlord shall have the option to terminate this Lease in part as to the Building so damaged. Notwithstanding the foregoing, if Landlord so partially terminates this Lease, Tenant may within fifteen (15) days after receipt of Landlord's notice of termination agree to pay the cost to restore the damage to the extent it exceeds five percent (5%) of the then replacement cost of the Building so damaged, in which case this Lease shall not be so partially terminated and Landlord shall proceed to restore the damage following receipt of Tenant's contribution toward the cost of restoration. (2) In the event any one of the Buildings is damaged by any peril, whether or not covered by the insurance carried pursuant to Section 11.2, during the last year of the Lease term (as it may be extended) to such an extent that the estimated cost to restore exceeds an amount equal to six (6) times the then Base Monthly Rent allocable to the Building(s) so damaged, then Landlord shall have the option to terminate this Lease in part as to the Building(s) so damaged. Notwithstanding the foregoing, Landlord may not so terminate this Lease pursuant to this subparagraph if Tenant, at the time of such damage, has an express written option to further extend the Lease Term and Tenant exercises such option to so further extend the Lease Term within fifteen (15) days following Landlord's exercise of its option to terminate. C. If any one or more of the Buildings is damaged by any peril and Landlord does not elect to terminate this Lease as to the Building(s) so damaged or is not entitled to terminate this Lease pursuant to Section 12B, then as soon as reasonably practicable, Landlord shall furnish Tenant with the written opinion of Landlord's architect or construction consultant as to when the -27- restoration work required of Landlord may be completed and the estimated cost of such restoration work. Tenant shall have the following options to terminate this Lease, either in whole or in part, which may be exercised only by delivery to Landlord of a written notice of election to terminate within fifteen (15) days after Tenant receives from Landlord the estimate of the time needed to complete such restoration: (1) Tenant may terminate this Lease as to any one or more of the Building(s) so damaged, if the damage is caused by a peril not covered by the insurance carried pursuant to Section 11.2 and the cost to restore the damaged Building exceeds five percent (5%) of the then replacement cost thereof. Notwithstanding the foregoing, if Tenant elects to exercise such option to terminate, Landlord may within fifteen (15) days after receipt of Tenant's notice of termination agree to pay the entire cost of restoration, in which case such option to terminate shall be of no further force and effect and Landlord shall proceed to restore the damage. (2) Tenant may terminate this Lease as to any one or more of the Building(s) so damaged, if any Building is damaged by a peril (whether or not covered by the insurance required to be carried pursuant to Section 11.2) during the last year of the Lease term and (i) such damage affects more than twenty percent (20%) of the building area within the Building that would be affected by Tenant's exercise of its option to terminate, and (ii) such damage cannot be substantially restored within sixty (60) days following the date of such damage. (3) Tenant may terminate this Lease as to any one or more of the Building(s) affected by the damage, in the event any Building is damaged by any peril (whether or not covered by the insurance required to be carried pursuant to Section 11.2) and the restoration cannot be completed by Landlord within two hundred seventy (270) days after the date of such damage. D. If this Lease is terminated in whole or in part by the proper exercise of an option to terminate granted to Landlord or Tenant by this Lease, then (i) this Lease shall terminate as to -28- the Building(s) affected by the termination fifteen (15) days after the date the option to terminate is properly exercised, (ii) the Base Monthly Rent and all other charges due hereunder shall be prorated as of the date of termination, and (iii) neither Landlord nor Tenant shall have any further rights or obligations under this Lease with respect to that part of the Premises affected by such termination except for those that have accrued prior to the date of termination. In addition to the foregoing, in the event this Lease is terminated in part as to one or more Buildings, then the following shall apply: (1) Tenant's Pro Rata Share shall be adjusted by subtracting from the numerator of the fraction set forth in Section 3.4 the number of square feet contained within the Building(s) as to which this Lease is terminated. (2) The then Base Monthly Rent shall be reduced by an amount proportionately equal to the reduction in the number of square feet of the Premises thereafter covered by this Lease. E. Landlord's obligation (should it elect or be obligated to repair or rebuild) shall be limited to the basic Buildings and the leasehold improvements paid for with the Improvement Allowance and installed pursuant to Exhibit "B". Tenant shall at its own expense forthwith replace or fully repair all trade fixtures, equipment and leasehold improvements other than those paid for with the Improvement Allowance and installed pursuant to Exhibit "B". All insurance shall be made available to Landlord to permit it to discharge its obligations under this lease regarding restoration; provided, however, that Tenant shall receive proceeds payable under the insurance carried pursuant to Section 11.2, to the extent any proceeds remain after deducting that portion attributable to the shell of the Building(s), the leasehold improvements existing as of the Occupancy Date for such Building(s) and the leasehold improvements installed with the Improvement Allowance, that are fairly allocable to the leasehold improvements installed at the expense of Tenant. -29- F. In the event of any damage to the Premises which does not result in a termination of this Lease, in whole or in part, the Base Monthly Rent and other sums payable hereunder shall be temporarily abated proportionately with the degree to which Tenant's use of the Premises is impaired by such damage (based upon the ratio of building area rendered unusable to the total building area), commencing from the date of such damage or destruction and continuing during the period required by Landlord to complete its restoration of the Premises. Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the Premises, damage to Tenant's personal property or any inconvenience occasioned by such damage or restoration. Tenant hereby waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil Code, and the provisions of any similar law hereafter enacted. G. In the event that Landlord becomes obligated to restore damage to the Premises caused by a peril not covered by the insurance carried pursuant to Section 11.2, then the following shall apply: (1) Landlord shall restore such damage at its sole cost and expense. (2) The cost of restoring such uninsured loss shall be treated in the same manner as the construction by Landlord of a capital improvement required by future Law, as provided in Section 7.3(b), so that the cost of restoration is amortized over the useful life of the restoration, and as additional rent, Tenant shall pay an amount equal to the monthly amortization payment required to so amortize the cost of such restoration for each month after the restoration is completed until (i) the expiration of the initial Lease term if the uninsured loss occurs during the initial Lease term, or (ii) the expiration of the then current Option Period if the uninsured loss occurs during such Option Period. (3) Notwithstanding the foregoing, if Tenant elects to terminate this Lease pursuant to Section 12C(l) because of damage not covered by insurance, and if Landlord elects to pay the -30- cost of restoration pursuant to such Section to avoid such termination, then the additional rent required to be paid pursuant to subparagraph (2) above shall be based only on the lesser of (i) the actual cost of restoration, or (ii) ten percent (10%) of the then replacement cost of the Building(s) damaged. The rent shall not be increased as a result of restoration costs paid by Landlord for uninsured loss in excess of ten percent (10%) of the then replacement cost of the Building(s) damaged. 13. CONDEMNATION. ------------ 13.1 Definition of Terms. For the purposes of this Lease, the term ------------------- (1) "Taking" means a taking of the Premises or damage to the Premises related to the exercise of the power of eminent domain and includes a voluntary conveyance, in lieu of court proceedings, to any agency, authority, public utility, person or corporate entity empowered to condemn property; (2) "Total Taking" means the taking of the entire Premises or so much of the Premises as to prevent or substantially impair the use thereof by Tenant for the uses herein specified; (3) "Partial Taking" means the taking of only a portion of the Premises which does not constitute a Total Taking; (4) "Date of Taking" means the date upon which the title to the Premises, or a portion thereof, passes to and vests in the condemnor or the effective date of any order for possession if issued prior to the date title vests in the condemnor; and (5) "Award" means the amount of any award made, consideration paid, or damages ordered as a result of a Taking. 13.2 Rights. The parties agree that in the event of a Taking all ------ rights between them or in and to an Award shall be as set forth herein and Tenant shall have no right to any Award except as set forth herein. 13.3 Total Taking. In the event of a Total Taking during the term ------------ hereof (1) the rights of Tenant under the Lease and the leasehold estate of Tenant in and to the Premises shall cease and be terminated as of the Date of Taking; (2) Landlord shall refund to Tenant any prepaid rent; (3) Tenant shall pay to Landlord any rent or charges due Landlord under the Lease, each prorated as -31- of the Date of Taking; (4) Tenant shall receive from the Award those portions of the Award attributable to trade fixtures and moving expenses of Tenant; and (5) the remainder of the Award shall be paid to and be the property of Landlord. Notwithstanding the provisions of Section 13.3, Tenant shall be entitled to that portion of any Award attributable to the leasehold improvements which Tenant would be entitled to remove from the Premises. 13.4 Partial Taking. In the event of a Partial Taking during the term -------------- hereof (1) the rights of Tenant under the Lease and the leasehold estate of Tenant in and to the portion of the Premises taken shall cease and terminate as of the Date of Taking; (2) from and after the Date of Taking the Base Monthly Rent shall be an amount equal to the product obtained by multiplying the Base Monthly Rent immediately prior to the Taking by the quotient obtained by dividing the number of square feet of floor area contained in the Premises after the Taking by the number of square feet of floor area contained in the Premises prior to the Taking; (3) Tenant shall receive from the Award the portions of the Award attributable to trade fixtures of Tenant; and (4) the remainder of the Award shall be paid to and be the property of Landlord. 14. ASSIGNMENT AND SUBLETTING. ------------------------- 14.1 Transfer. The following provisions shall apply to any -------- assignment, subletting or other transfer by Tenant or any subtenant or assignee or other successor in interest of the original Tenant (collectively referred to in this paragraph as "Tenant"): A. Tenant shall not do any of the following (collectively referred to herein as a "Transfer"), whether voluntarily, involuntarily, or by operation of law, without the prior written consent of Landlord, which consent shall not be unreasonably withheld: (i) assign or otherwise transfer its interest in this Lease or in the Premises; (ii) sublet all or any part of the Premises or allow it to be sublet, occupied or used by any person or entity other than Tenant; (iii) transfer any right appurtenant to this Lease or the Premises; or (iv) mortgage, pledge, -32- hypothecate or encumber this Lease. Any attempt to Transfer without Landlord's consent shall constitute a default by Tenant and shall be voidable at Landlord's option. Landlord's consent to any one Transfer shall not constitute a waiver of the provisions of this paragraph 14.1 as to any subsequent transfer nor a consent to any subsequent Transfer. No Transfer, even with the consent of Landlord, shall relieve Tenant of its personal and primary obligation to pay the rent and to perform all of the other obligations to be performed by Tenant hereunder. The acceptance of rent by Landlord from any person shall not be deemed to be a waiver by Landlord of any provision of this Lease nor to be a consent to any Transfer. B. Tenant shall give Landlord at least fifteen (15) days prior written notice of its desire to Transfer and of the proposed terms of such Transfer, which notice shall include: (i) the name and legal composition of the proposed transferee; (ii) the nature of the proposed transferee's business to be carried on in the Premises; (iii) the basic terms and provisions of the proposed sublease, assignment or other transfer, including, without limitation, all consideration to be given on account of the Transfer; and (iv) a financial statement or other reasonable financial information that Landlord may request concerning the proposed transferee. Tenant's notice shall not be deemed to have been served or given until such time as Tenant has provided Landlord with all information reasonably requested by Landlord pursuant to this subparagraph (b). Tenant shall immediately notify Landlord of any modifications to the proposed terms of such Transfer. C. In the event that Tenant seeks to make any Transfer, Landlord shall have the right to withhold its consent to such Transfer, as permitted pursuant to subparagraph (a) above, or to exercise any of the rights set forth in this subparagraph (c) by giving written notice of its election within fifteen (15) days after Tenant's notice of intent to transfer has been deemed given to Landlord. The following rights are in addition to Landlord's right to withhold its consent to any transfer and may be exercised -33- by Landlord at its sole discretion without limiting Landlord in the exercise of any other right or remedy which Landlord may have: (1) Landlord may elect to permit Tenant to so assign the Lease or sublease such part of the Premises on the terms and conditions contained in Tenant's notice, in which event Tenant may do so, without being released of its liability for the performance of all of its obligations under the Lease. D. Tenant expressly agrees that the provisions of this paragraph 14.1 are not unreasonable standards or conditions for purposes of Section 1951.4 of the California Civil Code, as amended from time to time. E. Notwithstanding anything to the contrary in this Section 14, Tenant may enter into any of the following transactions, so long as it first notifies Landlord in writing of its intent to do so and provides Landlord with a copy of the instrument implementing such Transfer, without the prior consent of Landlord: (i) any Transfer to a corporation which controls, is controlled by, or is under common control with Tenant (with "control" meaning ownership of more than fifty percent (50%) of the stock or beneficial interest); (ii) an assignment of the Lease in connection with the sale of all or substantially all of the assets of Tenant; (iii) a Transfer made in connection with a merger, consolidation or other non-bankruptcy reorganization of Tenant or a Transfer of stock ownership in Tenant. 14.2 Attorneys' Fees. Tenant shall pay Landlord's reasonable --------------- attorneys' fees not to exceed Five Hundred Dollars ($500.00) incurred in connection with Landlord's review of the proposed assignment, sublease or transfer. 15. SUBORDINATION. ------------- 15.1 Subordination. This Lease at Landlord's option shall be subject ------------- and subordinate to all ground or underlying leases which now exist affecting the Premises or the Parcel, or both, and to the lien of any mortgages or deeds of trust in any amount or amounts whatsoever which now exist against the Premises and/or the Parcel, or on or against Landlord's interest or estate therein or -34- on or against any ground or underlying lease, without the necessity of the execution and delivery of any further instruments on the part of Tenant to confirm such subordination; provided, however, that Landlord shall use all reasonable efforts to obtain within sixty (60) days from the date hereof a recognition and nondisturbance agreement whereby the lessor under any such ground or underlying lease and holder of any mortgage or deed of trust shall agree that, so long as Tenant is not in default hereunder, this Lease shall remain in full force and effect notwithstanding the termination of any such lease or foreclosure of such mortgage or deed of trust. If any mortgagee, trustee or ground lessor shall elect to have this Lease prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Tenant, this Lease shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease is dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of the recording thereof. 15.2 Subordination Agreements. Tenant covenants and agrees to ------------------------ promptly execute and deliver upon demand without charge therefor, any instrument or instruments of subordination necessary to subordinate this Lease to any future ground or underlying leases and/or to the lien of any future mortgage or deed of trust in any amount or amounts whatsoever which may hereafter be placed by Landlord on or against the Premises and/or the Parcel, or on or against Landlord's interest or estate therein or on or against any ground or underlying lease; provided, however, Tenant shall not be required to execute and deliver any such subordination agreement unless the lender consents in writing to the Lease and agrees in writing that in the event of foreclosure of the mortgage, or in the event the lender comes into possession or acquires title to the Premises as a result of the foreclosure of its mortgage or the notes secured thereby, or as a result of any other means, the lender agrees that the Lease shall not be terminated and that lender shall recognize Tenant and further agrees that Tenant shall not be disturbed in its possession of the Premises for any reason -35- other than one which would entitle the Landlord to terminate the Lease under its terms or that would cause, without any further action by Landlord, the termination of the Lease or would entitle Landlord to dispossess the Tenant from the Premises. 15.3 Quiet Enjoyment. Landlord covenants and agrees with Tenant that --------------- upon Tenant paying rent and other monetary sums due under the Lease and performing its covenants and conditions, Tenant shall and may peaceably and quietly have, hold and enjoy the Premises for the Term, subject however to the term of the Lease and of any of the ground leases, mortgages or deeds of trust described above. 15.4 Attornment. In the event any proceedings are brought for default ---------- under any ground or underlying lease or in the event of foreclosure or the exercise of the power of sale under any mortgage or deed of trust made by Landlord covering the Premises, Tenant shall attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Landlord under this Lease; provided said purchaser expressly agrees in writing to be bound by the terms of the Lease. 16. DEFAULT; REMEDIES. ----------------- 16.1 Default. The occurrence of any of the following shall constitute ------- a material default and breach of this Lease by Tenant: A. Any failure by Tenant to pay the rent or any other monetary sums required to be paid hereunder (where such failure continues for seven (7) days after written notice thereof by Landlord to Tenant); B. The abandonment of the Premises by Tenant; C. A failure by Tenant to observe and perform any other provisions of this Lease to be observed or performed by Tenant, where such failure continues for twenty (20) days after written notice thereof by Landlord to Tenant; provided, however, that if the nature of such default is such that the same cannot reasonably be cured within such twenty (20) day period, Tenant shall not be deemed to be in default if Tenant shall within such -36- period commence such cure and thereafter diligently prosecute the same to completion; D. The making by Tenant of any general assignment for the benefit of creditors; E. A court makes or enters any decree or order with respect to Tenant or Tenant submits to or seeks a decree or order (or petition or pleading is filed in connection therewith) which (i) grants or constitutes (or seeks) an order for relief, appointment of a trustee or confirmation of a reorganization plan under the Bankruptcy Laws of the United States; (ii) approves as properly filed (or seeks such approval of) a petition seeking liquidations or reorganization under said Bankruptcy Laws or any other debtor's relief law or statute of the United States or any state thereof; (iii) otherwise directs (or seeks) the winding up or liquidation of Tenant; provided, however, that if any such petition, decree or order is not voluntarily filed or made by Tenant, that Tenant shall not be in default until such petition, decree or order remains undischarged for a period of sixty (60) days. 16.2 Remedies. In the event of any such material default or breach by -------- Tenant, Landlord may at any time thereafter, with or without notice and demand and without limiting Landlord in the exercise of any right or remedy at law or in equity which Landlord may have by reason of such default or breach: A. Maintain this Lease in full force and effect and recover the rent and other monetary charges as they become due, without terminating Tenant's right to possession, irrespective of whether Tenant shall have abandoned the Premises. In the event Landlord elects to not terminate the Lease, Landlord shall have the right to attempt to re-let the Premises at such rent and upon such conditions and for such a term, and to do all acts necessary to maintain or preserve the Premises as Landlord deems reasonable and necessary without being deemed to have elected to terminate the Lease including removal of all persons and property from the Premises; such property may be removed and stored in a public -37- warehouse or elsewhere at the cost of and for the account of Tenant. In the event any such re-letting occurs, this Lease shall terminate automatically upon the new Tenant taking possession of the Premises. B. Terminate Tenant's right to possession by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In the event Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default including without limitation thereto, the following: (i) the worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award, exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom; plus (v) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable state law. Upon any such re-entry Landlord shall have the right to make any reasonable repairs, alterations or modifications to the Premises, which Landlord in its sole discretion deems reasonable and necessary. As used in clauses (i) and (ii) above, the "worth at the time of award" is computed by allowing interest at the rate specified in Paragraph 20.14 from the date of default. As used in clause (iii), the "worth at time of award" is computed by discounting such amount at the discount rate of the U.S. Federal Reserve Bank at the time of award plus one percent (1%). The term "rent", as used in this Section 16, shall be deemed to be and to mean the rent to be paid pursuant to Sec- -38- tion 3 and all other monetary sums required to be paid by Tenant pursuant to the terms of this Lease. 16.3 Default by Landlord. Landlord shall not be in default unless ------------------- Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event later than thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligation, provided however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty-day period and thereafter diligently prosecutes the same to completion. 17. OPTIONS ------- 17.1 Options to Extend. Tenant is hereby granted one option to extend ----------------- the term of this Lease for one period of three (3) years (the "Option Term"), such extension to be on the same terms and conditions as the initial term, except for the Base Monthly Rent which shall be determined as provided in Paragraph 3.4 above. It shall be a condition precedent to the exercise of the option that Tenant shall not be in default under this Lease at the time of exercise of such option. If Tenant elects to exercise the option, Tenant shall exercise said option only by written notice delivered to Landlord at least ninety (90) days prior to the expiration of the initial term of this Lease. There shall be no further options to extend the term of this lease at the end of the Option Term. 18. OUTSIDE AREA. ------------ 18.1 Use of Outside Area. The term "Outside Area" as used in this ------------------- Lease shall mean the driveways, walkways, parking areas, landscaped areas, and all other areas on the Parcel which are outside of a building. Subject to the terms and conditions of this Lease and such rules and regulations as Landlord may from time to prescribe, which shall be subject to the reasonable approval of Tenant, Tenant's employees, invitees and customers shall, in common -39- with other occupants of the Parcel, and their respective employees, invitees and customers, and others entitled to the use thereof, have the non-exclusive right to use the access roads, parking areas, driveways, and walkways which are provided and designated by Landlord for the general use and convenience of the occupants of the Parcel. Landlord reserves the right from time to time to make changes in the shapes, size, location, amount and extent of the Outside Area. Landlord further reserves the right to promulgate such reasonable rules and regulations relating to the use of the Outside Area and any part or parts thereof, as Landlord may deem appropriate for the best interest of the occupants of the Parcel. The approved rules and regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant, and Tenant shall abide by them and cooperate in their observance. Such rules and regulations may be amended by Landlord from time to time, with or without advance notice, and all amendments shall be effective upon delivery of a copy to Tenant. Tenant shall have the nonexclusive right to use all parking spaces located in the Outside Area as outlined in red on Exhibit "A". Tenant shall not park or permit the parking of Tenant's vehicles or trucks or the vehicles or trucks of Tenant's employees, invitees, customers, suppliers or others, in any other portion of the Outside Area not designated by Landlord for such use by Tenant. Tenant shall not abandon any inoperative vehicles or equipment on any portion of the Outside Area. Tenant shall make no alterations, improvements or additions to the Outside Area. Landlord shall operate, manage, maintain, and repair the Outside Area in good order, condition and repair. Such maintenance and repair shall include parking lot sweeping, landscaping services, maintenance or repair or fountains, landscape irrigation systems, paving, sidewalks, fences and lighting. The manner in which the Outside Area shall be maintained and the expenditures for such maintenance shall be at the discretion of Landlord. Landlord's cost of such repair, maintenance, operation and management shall be referred to herein as "Outside Area Expenses." Tenant -40- shall pay to Landlord its share of such Outside Area Expenses as provided in Paragraph 18.2 below. 18.2 Outside Area Expenses. Tenant shall pay to Landlord, as --------------------- Additional Rent, within thirty (30) days after receipt of billing but not more often than once each calendar month, Tenant's Pro Rata Share of the Outside Area Expenses. Tenant acknowledges and agrees that the Outside Area Expenses shall include an additional five percent (5%) of the actual expenditures in order to compensate Landlord for accounting and processing services. Tenant shall have the right to inspect the supporting records of Landlord with respect to the Outside Area Expenses. Notwithstanding anything contained in this Section 18, the term "Outside Area Expenses" shall not include, nor shall Tenant have any obligation to pay, any of the following: (i) depreciation on real property, interest expense or rent due pursuant to any underlying ground leases; (ii) the cost to correct any defective design or construction of the Outside Area; (iii) the cost to correct or repair damage to the Outside Areas to the extent it is required to be covered by insurance pursuant to Section 11.2 of the Lease or is covered by any warranty; (iv) the cost of any repair required or resulting from the negligence of Landlord, its agents or contractors or (v) any fee or compensation for management or administration of the Premises in addition to the referenced fee for accounting and processing services. Landlord shall use all reasonable efforts to obtain services and materials to be provided hereunder at the fair market value which would be charged by an independent third party providing such service or material. 19. EXPANSION. Provided Tenant is not in default under this Lease and --------- provided that this Lease is in full force and effect and provided further that Tenant has not assigned this Lease, then Tenant shall have the following rights to lease, at the termination of the existing lease (including, all extension options) to Altera Semiconductor, Inc. ("Altera"), the space in Building D presently leased to Altera. Tenant further acknowledges that Altera has an option to extend the term of its existing lease. -41- A. Before listing or advertising Building D to prospective tenants or purchasers, Landlord shall first notify Tenant of the availability of Building D and shall present the first offer to lease Building D to Tenant. B. After presentation of Landlord's offer, and provided that Landlord and Tenant are unable to reach agreement, following good faith negotiations, as to the terms and conditions under which the parties would be willing to enter into a lease of Building D, Tenant shall have a right of first refusal to lease Building D as set forth herein. If Landlord proposes to lease a space in Building D (the "Available Space") to a prospective tenant and if Altera has failed to exercise any right of first refusal it may have as to the Available Space, then Landlord shall notify Tenant in writing of the following basic business terms upon which the Landlord is willing to lease such space (collectively referred to herein as the "Basic Business Terms"): (i) the description of the Available Space; (ii) the term of the Lease; (iii) the tenant improvements Landlord is willing to construct or that it will require to be constructed and the contribution Landlord is willing to make to pay for such tenant improvements; (iv) the rent for initial term or the formula to be used to determine such rent (including, if applicable) free rent, Tenant's share of taxes, assessments, operating expenses, insurance costs and the like; (v) any option or options to extend (including the rent to be charged during the extension periods); and (vi) any other material business term Landlord elects to specify. C. If Tenant, within ten (10) business days after receipt of Landlord's notice, delivers to Landlord its written agreement to lease the Available Space on the Basic Business Terms stated in Landlord's Notice, the Landlord shall lease to Tenant and Tenant shall lease from Landlord the Available Space on the terms and conditions in Landlord's Notice (the "Second Lease") provided, however, that this Lease shall be modified to include, and the Second Lease shall include, a cross-default provision providing -42- that Tenant will be in default under both the Second Lease and this Lease, if it is in default under either Lease. D. If Tenant does not deliver to Landlord its written agreement to the Second Lease on the terms contained in Landlord's notice within said ten (10) business day period, then Landlord shall thereafter have the right to lease the Available space on the same Basic business Terms set forth in Landlord's notice and on such form of Lease, as Landlord chooses; provided, however, that Landlord may make any changes to such form of lease at the request of any prospective tenant to induce it to lease such space from Landlord so long as Landlord does not change the Basic Business Terms set forth in Landlord's notice. E. The provisions of this paragraph shall terminate upon (i) the expiration or earlier termination of this Lease; or (ii) any assignment by Tenant of its interest in this Lease or the subletting by Tenant of substantially all of the Premises for substantially all of the remainder of the Lease Term; or (iii) as to any particular space, Tenant's failure to exercise its right of refusal granted herein as to such space at its first opportunity to do so. F. Provided that Tenant shall have exercised its option to lease Building D, Landlord shall, at least one hundred twenty (120) days before the renewal date for the insurance carried by Landlord pursuant to Section 11.2, provide Tenant with a statement identifying the material terms of such insurance coverage, including the premiums payable, coverage limits and deductibles required. In the event that Tenant reasonably determines that Tenant can maintain such insurance at a cost to Tenant of at least five percent (5%) less than the cost to Tenant of reimbursing the cost of maintaining such coverage to Landlord, then Tenant shall be entitled to notify Landlord, no more than thirty (30) days following receipt of Landlord's statement, that Tenant intends to maintain such insurance. Tenant shall thereafter maintain the insurance required by Section 11.2 hereof, in conformance with consistent requirements imposed from time to time by the holders of -43- mortgages or deeds of trust of the Premises, including, if required, delivery to such parties of reasonably satisfactory evidence of the maintenance of such coverage. 20. MISCELLANEOUS. ------------- 20.1 Estoppel Certificate. -------------------- A. Tenant shall at any time upon not less than ten (10) business days' prior written notice from Landlord execute, acknowledge and deliver to Landlord a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed, and (iii) certifying, to the best of Tenant's knowledge, such other information and facts concerning this lease as may be reasonably requested by a lender making a loan to Landlord to be secured by a deed of trust or mortgage covering the Premises or a purchaser of the Premises from Landlord. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. B. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant (i) that this Lease is in full force and effect without modification except as may be represented by Landlord, (ii) that there are no uncured defaults in Landlord's performance, and (iii) that not more than one month's rent has been paid in advance. 20.2 Transfer of Landlord's Interest. In the event of a sale or ------------------------------- conveyance by Landlord of Landlord's interest in the Premises other than a transfer for security purposes only, Landlord shall be relieved from and after the date specified in such notice of transfer of all obligations and liabilities accruing thereafter on the part of the Landlord, provided that any funds in the hands of Landlord at the time of transfer in which Tenant has an -44- interest, shall be delivered to the successor of Landlord. This Lease shall not be affected by any such sale and Tenant agrees to attorn to the purchaser or assignee provided all of Landlord's obligations hereunder accruing after the date of transfer are assumed in writing by the transferee. 20.3 Captions; Attachments; Defined Terms. ------------------------------------ A. The captions of the paragraphs of this Lease are for convenience only and shall not be deemed to be relevant in resolving any question of interpretation or construction of any section of this Lease. B. Exhibits attached here to, and addenda and schedules initialed by the parties, are deemed by attachment to constitute part of this Lease and are incorporated herein. C. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. Words used in neuter gender include the masculine and feminine and words in the masculine and feminine gender include the neuter If there be more than one Landlord or Tenant, the obligations hereunder imposed upon Landlord or Tenant shall be joint and several. If the Tenants are husband and wife, the obligations shall extend individually to their sole and separate property as well as to their community property. The term "Landlord" shall mean only the owner or owners at the time in question of the fee title. The obligations contained in this Lease to be performed by Landlord shall be binding on Landlord's successors and assigns only during their respective periods of ownership. 20.4 Entire Agreement. This instrument along with any exhibits and ----------------- attachments hereto constitutes the entire agreement between Landlord and Tenant relative to the Premises and this Agreement and the exhibits and attachments may be altered, amended or revoked only by an instrument in writing signed by both Landlord and Tenant. Landlord and Tenant agree hereby that all prior or contemporaneous oral agreements between and among themselves and their agents or representatives relative to the leasing of the Premises are merged in or revoked by this Agreement. -45- 20.5 Severability. If any term or provision of this Lease shall, to ------------ any extent, be determined by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this Lease shall not be affected thereby, and each term and provision of the Lease shall be valid and enforceable to the fullest extent permitted by law. 20.6 Costs of Suit. ------------- A. If Tenant or Landlord shall bring any action for any relief against the other, declaratory or otherwise, arising out of this Lease, including any suit by Landlord for the recovery of rent or possession of the Premises, the losing party shall pay the successful party a reasonable sum for attorneys' fees which shall be deemed to have accrued on the commencement of such action and shall be paid whether or not such action is prosecuted to judgment. B. Should Landlord, without fault on Landlord's part, be made a party to any litigation instituted by Tenant or by a third party against Tenant, or by or against any person holding under or using the Premises by license of Tenant, or for the foreclosure of any lien for labor or material furnished to or for Tenant or any such other person or otherwise arising out of or resulting from any act or transaction of Tenant or of any such other person, Tenant covenants to save and hold Landlord harmless from any judgment rendered against Landlord or the Premises or any part thereof, and all costs and expenses incurred by Landlord or in connection with such litigation, including reasonable attorneys' fees paid by Landlord to attorneys approved by Tenant. 20.7 Time; Joint and Several Liability. Time is of the essence of --------------------------------- this Lease and each and every provision hereof, except as to the conditions relating to the delivery of possession of the Premises to Tenant. All the terms, covenants and conditions contained in this Lease to be performed by either party shall consist of more than one person or organization, shall be deemed to be joint and several, and all rights and remedies of the parties -46- shall be cumulative and non-exclusive of another remedy at law or in equity. 20.8 Binding Effect; Choice of Law. The parties hereto agree that all ----------------------------- the provisions hereof are to be construed as both covenants and conditions as though the words importing such covenants and conditions were used in each separate paragraph hereof; subject to any provision hereof restricting assignment or subletting by Tenant and subject to Section 20.2, all of the provisions hereof shall bind and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. This Lease shall be governed by the laws of the State of California. 20.9 Waiver. No covenant, term or condition or the breach thereof, ------ shall be deemed waived, except by written consent of the party against whom the waiver is claimed, and any waiver or the breach of any covenant, term or condition shall not be deemed to be a waiver of any preceding or succeeding breach of the same or any other covenant, term or condition. 20.10 Surrender of Premises. The voluntary or other surrender of this --------------------- Lease by Tenant, or a mutual cancellation thereof shall not work a merger, and shall, at the option of the Landlord, terminate all or any existing subleases or subtenancies, or may, at the option of Landlord operate as an assignment to it or any or all such subleases or subtenancies. 20.11 Holding Over. This Lease shall terminate without further notice ------------ at the expiration of the Lease Term. Any holding over by Tenant after expiration shall not constitute a renewal or extension or give Tenant any rights in or to the Premises except as expressly provided in this Lease; provided, however, that in the event Tenant notifies Landlord in writing at least ninety (90) days before the expiration of the Lease term, Tenant shall be entitled to a one-time thirty (30) day extension of the expiration of the Lease term. Any holding over after the expiration with or without the expressed or implied consent of Landlord shall be construed to be a tenancy from month to month, at one hundred percent (100%) of -47- the monthly rent for the last month of the Lease Term during the first ninety (90) days of such holding over, and thereafter at one hundred twenty-five percent (125%) of such rent, and shall otherwise be on the terms and conditions herein specified insofar as applicable. 20.12 Signs. Tenant shall not place any sign upon the Premises or the ----- Outside Area without Landlord's prior written consent. Landlord hereby consents, subject to compliance with requirements of the City of Santa Clara and to the reasonable approval of Landlord of plans and specifications therefor, to the erection of monument signs at such locations as Tenant shall reasonably require and to the placement of identifying logos on the Building(s) constituting the leased Premises. Following the expiration of the Lease term, Tenant shall remove such logos from the Building(s) and shall restore the facade of the Building to its condition existing prior to their erection. Obtaining permits for Tenant signs as may be required by any governmental agency shall be the responsibility of Tenant. 20.13 Reasonable Consent. Except as limited elsewhere in this Lease, ------------------ wherever in this Lease Landlord or Tenant is required to give consent or approval to any action on the part of the other, such consent or approval shall not be unreasonably withheld. In the event of failure to give any such consent, the other party shall be entitled to specific performance at law and shall have such other remedies to it under this Lease, but in no event shall Landlord or Tenant be responsible in monetary damages for failure to give consent unless said failure is withheld maliciously or in bad faith. 20.14 Interest on Past Due Obligations. Any amount due to Landlord not -------------------------------- paid when due shall bear interest from the due date at a per annum rate equal to three percent (3%) in excess of the then existing Bank of America prime rate, or the maximum rate permitted by law, whichever is less. 20.15 Recording. Tenant shall not record this Lease without Landlord's --------- prior written consent. Either party shall, upon -48- request of the other, execute, acknowledged and deliver to the other a "short form" memorandum of this Lease for recording purposes. 20.16 Notices. All notices or demands of any kind required or desired ------- to be given by Landlord or Tenant hereunder shall be in writing and shall be effective upon receipt or rejection at the addresses set forth below: Landlord: MPJ 511 Division Street Campbell, CA 95008 Attn: James D. Mair Copy to: W. Leslie Pelio 560 Division Street Campbell, CA 95008 Tenant: Apple Computer, Inc. 20525 Mariani Avenue, MS:16-0 Cupertino, CA 95014 Attn: Real Estate Dept. Either party may change its address for notice by giving written notice to the other party in accordance with the provisions of this paragraph. 20.17 Corporate Authority. If Tenant is a corporation, each ------------------- individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the Bylaws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. 20.18 Partnership Authority. Each individual executing this Lease on --------------------- behalf of Landlord represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of the Landlord and that this Lease is binding upon Landlord in accordance with its terms. 21. BROKERAGE COMMISSIONS. Landlord and Tenant represent that they have --------------------- not had any dealings with any real estate brokers or salesmen or incurred any obligations for the payment of real estate brokerage commissions or finder's fees which would be earned or due and payable by reason of the execution of this Lease other than to Cornish & Carey Commercial Real Estate and Grubb & Ellis Company -49- (the "Brokers"). Landlord shall pay any commission due to the Brokers. 22. HAZARDOUS MATERIALS. Landlord and Tenant agree as follows with ------------------- respect to the existence or use of "Hazardous Material" (as defined below) on the Premises: A. Tenant shall be entitled to cause such inspections, soils and groundwater tests, and other evaluations to be made of the Premises as Tenant deems necessary regarding (i) the presence and use of Hazardous Materials in or about the Premises, and (ii) the potential for exposure of Tenant's employees and other persons to any Hazardous Materials used and stored by previous occupants in or about the Premises. To facilitate assigning responsibility for the presence of any Hazardous Materials on the Premises, Tenant shall use its best efforts to take all samples of soil and groundwater necessary in the course of its inspection and evaluation before the Commencement Date as to each Building, and shall thereafter cause the evaluation of such samples to be conducted as promptly as reasonably possible. B. Landlord hereby makes the following warranties and representations to Tenant, each of which is made to the best of Landlord's knowledge as of the date of this Lease: (1) Any handling, transportation, storage, treatment, disposal, release or use of Hazardous Materials that has occurred on the Premises prior to the date hereof has been in compliance with all Hazardous Materials Laws. (2) The Premises are, and Landlord's operations concerning the Premises are, as of the date of this Lease, in compliance with all Hazardous Materials Laws. (3) The soil and groundwater on or under the Premises are free of Hazardous Materials in amounts which would (i) violate any Hazardous Materials Laws to the extent that any governmental entity could require either Landlord or Tenant to take any remedial action with respect to such Hazardous Materials, or (ii) pose a substantial risk of impairing the health of any -50- person on or about the Premises (including, without limitation, Tenant's employees, agents or invitees). (4) Neither the Premises nor any improvements thereon or personal property contained therein contains PCBs or asbestos. (5) No litigation has been brought or threatened, nor any settlements reached with any governmental or private party, concerning the actual or alleged presence of Hazardous Materials on or about the Premises or any disposal, release or threatened release of Hazardous Materials in or about the Premises prior to the date of this Lease. C. Landlord warrants and represents to Tenant that it has received no notice of (i) any violation, or alleged violation, of any Hazardous Material Law that has not been corrected to the satisfaction of the appropriate authority, (ii) any pending claims relating to the presence of Hazardous Material on the Premises, or (iii) any pending investigation by any governmental agency concerning the Premises relating to Hazardous Materials. Landlord is not aware of any reports, studies or other written evidence of any investigation of the Premises to determine the presence of Hazardous Materials. Each party shall deliver to the other copies of any report, study or other written evidence of any such investigation which comes into the possession of such party. Tenant shall notify Landlord in writing of all Hazardous Materials (except in incidental quantities) which Tenant brings onto the premises. D. Any handling, transportation, storage, treatment, disposal or use of Hazardous Materials by Tenant in or about the Premises shall strictly comply with all applicable Hazardous Materials Laws and shall be conducted in a manner which will not impair the health of any person on or about the Complex. E. Landlord at its sole expense shall remove from the Premises all Hazardous Materials and all facilities and equipment existing as of the Occupancy Date for each Building, whose removal is deemed necessary by an independent, qualified consultant chosen by Tenant in order (i) to avoid a violation at any time of -51- Hazardous Materials Laws, (ii) to eliminate a substantial risk of impairing the health of any person or about the Premises (including, without limitation, Landlord's or Tenant's employees, agents or invitees), or (iii) to satisfy the reasonably anticipated requirements of a financial institution which would be imposed as a precondition to such financial institution's acquiring a security or other interest in the Premises. All such facilities and equipment shall be decommissioned in accordance with applicable Hazardous Materials Laws and proper decommissioning shall be evidenced only by delivery to Tenant of reasonably satisfactory evidence of such fact. F. Landlord shall indemnify, defend upon demand with counsel reasonably acceptable to Tenant, and hold harmless Tenant from and against any and all (i) liabilities, judgments, interest, penalties, fines, monetary sanctions, attorneys' fees, experts' fees, and court costs resulting from any claim, demand, order or requirement of any governmental agency with jurisdiction or any claim or demand brought or threatened by any party other than the parties to this Lease, and (ii) reasonably incurred remediation costs, investigation costs and related expenses which result from or arise in any manner whatsoever out of: (1) The breach of any warranty or inaccuracy of any representation by Landlord or the failure of Landlord to perform any obligation of Landlord contained in this Section 22; (2) The presence of Hazardous Materials, as of the Occupancy Date for each Building, as may be disclosed by the inspections, soils and groundwater tests, other evaluations performed by Tenant, or otherwise disclosed or discovered, in amounts which exceed the minimum action levels or other standards imposed by Hazardous Materials Laws applicable at any time during the Lease term in or under the Premises or in the soil or groundwater underneath the Premises; (3) Use, storage, release or disposal of Hazardous Materials on or about the Promises by any party other than Tenant, -52- or its agents, employees or contractors, after the Occupancy Date for each Building; (4) The exposure of any person to a Hazardous Material stored, used or disposed of by any party other than Tenant in or about the Premises after the Occupancy Date for each Building. G. Tenant shall indemnify, defend upon demand with counsel reasonably acceptable to Landlord, and hold harmless Landlord from and against any and all liabilities, judgments, interest, penalties, fines, monetary sanctions, attorneys' fees, experts' fees and court costs resulting from any claim, demand, order or requirement of any governmental agency with jurisdiction or any claim or demand brought or threatened by any party other than the parties to this Lease, and (ii) reasonably incurred remediation costs, investigation costs and other related expenses which result from or arise in any manner whatsoever out of the following: (1) The use, storage, release or disposal of Hazardous Materials on or about the Premises by Tenant, its agents, employees, or contractors after the date hereof; (2) The exposure of any person to a Hazardous Material stored, used, released or disposed of by Tenant, its agents, employees, or contractors in or about the Premises after the date hereof. H. As used herein, the term "Hazardous Materials" means any substance, material or waste which is or becomes regulated by any local governmental authority, the State of California, or the United States Government. The term "Hazardous Materials" includes, without limitation, any material or substance which is (i) defined as a "hazardous waste", "extremely hazardous waste", or "restricted hazardous waste" under Sections 25115, 25117 or 15122.7, or listed pursuant to Section 25140 of the California Health and Safety Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law), (ii) defined as a "hazardous substance" under Section 25316 of the California Health and Safety Code, Division 20, Chapter 6.8 -53- (Carpenter-Presley-Tanner Hazardous Substances Account Act), (iii) defined as a "hazardous material", "hazardous substance", or "hazardous waste" under Section 25501 of the California Health and Safety Code, Division 20, Chapter 6.95 (Hazardous Materials Release, Response, Plans and Inventory), (iv) defined as a "hazardous substance" under Section 25281 of the California Health and Safety Code, Division 20, Chapter 6.7 (Underground Storage of Hazardous Substances), (v) petroleum, (vi) asbestos, (vii) listed under Article 9 or defined as "hazardous" or "extremely hazardous" pursuant to Article II of Title 22 of the California Administrative Code, Division 4, Chapter 20, (viii) designated as a "hazardous substance" pursuant to Section 311 of the Federal Water Pollution Control Act, 33 U.S.C. 1251 et seq. or listed pursuant to Section 307 of the Federal Water Pollution Control Act (33 U.S.C. 1317), (ix) defined as a "hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq., (x) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensations, and Liability Act, 42 U.S.C. 9601 et seq., or (xi) regulated under the Toxic Substances Control Act, 15 U.S.C. 2601 et seq. I. Landlord and Tenant shall each give written notice to the other as soon as reasonably practicable of (i) any communication received from any governmental authority concerning Hazardous Material which relates to the Premises and (ii) any contamination of the Premises by Hazardous Materials which constitutes a violation of any Hazardous Material Law. J. The obligations of Landlord and Tenant under this Section 22 shall survive the expiration or earlier termination of this Lease. K. The rights and obligations of Landlord and Tenant with respect to issues relating to Hazardous Material are exclusively established by this Section 22. In the event of any inconsistency between any other part of this Lease and this Section 22, the terms of this Section 22 shall control. -54- IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease the date and year first above written. LANDLORD: TENANT: MPJ, a California APPLE COMPUTER, INC., general partnership a California corporation By: /s/ James D. Mair By: /s/ Del Yocam ----------------------- --------------------------- Del Yocam, Executive Vice Title: General Partner President and Chief -------------------- Operating Officer By: /s/ W. Leslie Pelio ----------------------- Title: General Partner -------------------- -55- EXHIBIT "B" ----------- IMPROVEMENTS ------------ 1. The Premises shall be delivered to Tenant in their present condition. Landlord shall not be required to construct, furnish or install any work, alterations, additions or improvements to the Premises. 2. Tenant, at its expense, shall construct, furnish or install all improvements, equipment or fixtures within the Premises that are necessary for Tenant's occupancy and use of the Premises (hereinafter referred to as "Tenant's Work"). Tenant's Work shall be in conformity with plans submitted to and approved by Landlord and shall be performed all in accordance with the following provisions: A. Tenant shall cause all plans, drawings and specifications for Tenant's Work, whether preliminary or final, to be prepared by licensed architects and, where appropriate, mechanical, electrical and structural engineers. Tenant shall cause all plans, drawings and specifications for Tenant's Work to be prepared in strict compliance with all applicable governmental laws, ordinances, codes and regulations. B. Tenant shall prepare and submit to Landlord for its approval, which approval shall be given or refused within seven (7) days after submission of such drawings and if not refused within such time shall be deemed given, as to design, two sets of fully dimensioned scaled preliminary drawings of the Premises and Tenant's proposed work therein. C. Following approval of Tenant's preliminary drawings by Landlord, Tenant shall prepare final plans and specifications for Tenant's Work in conformity with such approved preliminary drawings, and shall furnish two copies of such final plans and specifications to Landlord for its determination as to the conformity with approved preliminary drawings and for its approval as to any matters not shown in the approved preliminary drawings. Landlord shall approve or disapprove such final plans and specifications within seven (7) days following receipt of the same -56- and in the event of disapproval, Tenant shall promptly revise and resubmit such final plans and specifications as required by Landlord. D. After approval of final plans and specifications by Landlord, Tenant shall at its sole cost, obtain all required building permits and other governmental approvals necessary to commence Tenant's Work. Immediately following the issuance of the building permits and other governmental approval, Tenant shall proceed forthwith to commence and complete performance of Tenant's Work. Tenant's contractors and subcontractors shall be acceptable to and approved by Landlord. Any damage to the Building of which the Premises are a part caused by Tenant or its contractors or subcontractors in connection with the performance of Tenant's Work shall be repaired at Tenant's expense. E. Any changes in Tenant's Work from the final plans and specifications approved by Landlord shall be subject to Landlord's approval, and Tenant shall pay all costs incurred by Landlord in reviewing any requested change. F. Upon completion of Tenant's Work, Tenant shall furnish to Landlord for its permanent files one reproducible set of "as built" drawings showing Tenant's Work as constructed or installed in the Premises. 3. If Tenant is not in default under this Lease and the Lease is in full force and effect, Landlord shall make available to Tenant the sum of Five Hundred Sixty-Four Thousand Four Hundred Eighty Dollars ($564,480.00) towards the cost of Tenant's Work in Building A, the sum of Seven Hundred Seventy-Four Thousand One Hundred Sixty Dollars ($774,166.00) towards the cost of Tenant's Work in Building B, and Eight Hundred Eighty-Nine Thousand Three Hundred Sixty Dollars ($889,360.00) towards the cost of Tenant's Work in Building C, in accordance with the terms and conditions of this Paragraph 3 (the "Improvement Allowance"). In the event that Tenant elects not to apply the entire amount of the Improvement Allowance designated for a particular Building in the improvement of that building, Tenant shall be entitled to apply the Improvement -57- Allowance to the remaining Building, providing that Tenant shall apply a minimum amount of the Improvement Allowance to each Building equal to the product of Five Dollars ($5.00) and the number of square feet comprising such Building, and further provided that the Improvement Allowance shall be applied to general purpose improvements. Upon the Commencement Date for each Building, on Tenant's request, Landlord shall reimburse Tenant up to the foregoing dollar sums, for the cost of Tenant's Work, provided that Tenant shall furnish Landlord: A. A statement from Tenant's architect certifying that the final plans and specifications were prepared in compliance with applicable Laws and, to the best of the architect's knowledge, that the Tenant's Work has been completed in compliance with the approved final plans and specifications; B. An itemized statement of such costs, certified as correct by Tenant; C. Copies of paid invoices evidencing that all work for which reimbursement is requested has been paid for in full by Tenant; D. Unconditional mechanic's lien releases from Tenant's general contractors, suppliers, materialmen and all subcontractors who have done work or supplied materials to the Premises; and E. An estoppel certificate executed by Tenant as described in Paragraph 20.1 of the Lease. Landlord's reimbursement obligation shall apply to any portion of the cost of Tenant's Work as to which Tenant fulfills its obligations in this paragraph 3. In the event that payment for any portion of the Tenant's Work is the subject of a good faith dispute, Landlord shall be entitled to withhold from the amount which would otherwise be reimbursable to Tenant a sum equal to one and one-half (1-1/2) times the amount in dispute. Landlord shall hold such withheld sums in an interest-bearing account and shall pay the sums so withheld to Tenant upon Tenant's compliance with this paragraph 3, together with the interest so earned. -58- In the event that any lien is recorded against Landlord's interest in the Complex as a result of construction performed for Tenant pursuant to this Exhibit B, Landlord shall be entitled to require Tenant to cause such lien to be released of record as provided in Section 9 of the Lease and, in the event that Tenant pays or bonds over such lien, and provided Tenant has complied with the provisions of this paragraph 3, Landlord shall release to Tenant the sums withheld. 4. Provided that Tenant has complied with its obligations pursuant to paragraph 3, if Landlord does not reimburse the full amount of the Improvement Allowance to tenant when due, Tenant shall be entitled, among its other rights or remedies, to offset against Base Monthly Rent, the amount of the Improvement Allowance due, together with interest at the rate stated in Section 20.14. * * * * * * * * * * * * * * * * * -59- EXHIBIT B SUBLEASED PREMISES ------------------ EXHIBIT C CONFIRMATION OF COMMENCEMENT DATE AGREEMENT ------------------------------------------- THIS CONFIRMATION OF COMMENCEMENT DATE AGREEMENT is entered into by and between Apple Computer, Inc., a California corporation ("Sublessor") and NVidia, a Delaware corporation ("Sublessee") with respect to the following facts: A. Sublessor and Sublessee entered into a Sublease dated as of April 2, 1998 with respect to those certain premises commonly known as 3535 Monroe Drive, Santa Clara, California (the "Subleased Premises"). B. Because the master landlord, MPJ, a California general partnership, was required to consent to the Sublease, the commencement date of the Subleased was not fixed. The parties hereto desire to set forth herein the commencement date of the Sublease and such other matters as may pertain thereto. NOW, THEREFORE, the parties agree as follows: 1. The term of the Sublease commenced on ________________, 1998, and will expire on December 31, 2002. Sublessee has accepted full and complete possession of the Subleased Premises. All of Sublessor's obligations which have accrued prior to the date hereof have been performed. 2. The Base Monthly Rent owing under Paragraph 3.1 of the Sublease is as follows: Insert Dates in lieu of months 1-12 insert Base Monthly Rent Insert Dates in lieu of months 13-24 insert Base Monthly Rent Insert Dates in lieu of months 25-36 insert Base Monthly Rent Insert Dates in lieu of months 37-48 insert Base Monthly Rent Insert Dates in lieu of months 49-55 insert Base Monthly Rent 3. All other terms and conditions of the Sublease shall remain unmodified and in full force and effect. APPLE COMPUTER, INC. NVIDIA a California corporation a Delaware corporation By: By: ------------------------------- ------------------------------- Its: Its: ------------------------------ ----------------------------- Date: Date: ----------------------------- ----------------------------- EXHIBIT D PARKING ------- EXHIBIT E ENVIRONMENTAL REPORT -------------------- EXHIBIT F TERMS OF FURNITURE PURCHASE --------------------------- 1. Purchase of Furniture. The total purchase price for the Furniture is --------------------- Three Hundred Fifty Six Thousand Eight Hundred Dollars ($356,800.00) which includes the California state tax (together, the "Furniture Price"). Upon execution of this Sublease, Sublessee agrees to purchase the furniture as itemized on the attached Schedule A (the "Initial Furniture"). Upon execution of the Sublease, Sublessee shall pay to Sublessor a deposit in the amount of Fifty Six Thousand Eight Hundred Dollars ($56,800.00) which will be applied to the purchase price of the Furniture. Commencing on the Commencement Date of the Sublease, Sublessee shall pay to Sublessor in twelve (12) equal monthly installments (without interest) of Twenty Five Thousand Dollars ($25,000.00) concurrently with Base Monthly Rent. The final installment of the Furniture Price shall be due and payable on May 31, 1999. 2. Title to Furniture. ------------------ 2.1 Furniture. Upon Sublessee's payment to Sublessor of the entire --------- remaining balance of the Furniture Price, Sublessor agrees to convey legal title to the Furniture itemized on the attached Schedule A (the "Furniture"), by bill of sale reasonably acceptable to Sublessee. Such conveyance shall be without representation or warranty whatsoever, except that Sublessor shall warrant that it holds legal title to the Remaining Furniture and that such Remaining Furniture is free and clear of all encumbrances created by or through Sublessor. 2.3 Sublease Termination. In the event that this Sublease terminates -------------------- due to a default by Sublessee which was not cured within any applicable grace period, Sublessee's right to acquire title to any furniture for which a bill of sale has not been given by Sublessor in accordance with paragraphs 2.1 or 2.2 above (or for which Sublessee is not otherwise entitled to pursuant to the terms thereof) shall terminate concurrently therewith. Upon such termination, Sublessor shall be entitled to retain all Furniture Payments made to the date of the termination and shall maintain full legal title to the Furniture for which a bill of sale has not been given by Sublessor in accordance with paragraphs 2.1 or 2.2 above (or for which Sublessee is not otherwise entitled to pursuant to the terms thereof). For example, if the Furniture Price allocable to the Initial Furniture is fully paid and the Sublease terminates after some payments of the Furniture Price allocable to the Remaining Furniture have already been made to Sublessor, Sublessee shall have no right whatsoever to claim title to any portion of the Remaining Furniture or to obtain any refund of such payments. In the event of a termination of the Sublease due to a casualty or condemnation as set forth in Sections 12 and 13 of the Master Lease, respectively, Sublessee may acquire legal title to that portion of the Furniture for which full payment of the Furniture Price has not yet been paid by making full payment to Sublessor prior to the date of termination. If Sublessee fails to pay the outstanding balance of the Furniture Price by such termination date, Sublessor shall be entitled to retain all Furniture Payments made to the date of the Termination and shall maintain full legal title to the Furniture for which a bill of sale has not been given by Sublessor in accordance with paragraphs 2.1 or 2.2 above (or for which Sublessee is not otherwise entitled to pursuant to the terms thereof). 3. Maintenance and Repair of Furniture. The Furniture is currently ----------------------------------- located in the Sublease Premises. By entering into this Sublease, Sublessee accepts the Furniture in its current condition, "as-is", and without representation or warranty of any kind. Sublessee shall not remove from the Sublease Premises the Furniture for which Sublessee has not yet received a bill of sale from Sublessor until the entire Furniture Price has been paid in full to Sublessor. Prior to payment of the entire Furniture Price to Sublessor, Sublessee shall maintain in good condition and repair that portion of the Furniture for which Sublessee has not yet received a bill of sale from Sublessor. Upon expiration of the Sublease term or any earlier termination of this Sublease, if Sublessee has failed to pay the entire Furniture Price to Sublessor as provided herein, Sublessee shall surrender the Furniture for which Sublessee has not yet received a bill of sale in accordance with paragraphs 2.1 or 2.2 above (or for which Sublessee is not otherwise entitled to pursuant to the terms thereof) in the same condition as that Furniture is in on the Commencement Date, normal wear and tear excepted. EXHIBIT G SUBLESSEE'S TENANT IMPROVEMENTS ------------------------------- EX-23.1 3 CONSENT OF KPMG PEAT MARWICK, LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders NVIDIA Corporation: We consent to the use of our report included herein and to the reference of our firm under the headings "Selected Financial Data" and "Experts" in the prospectus. KPMG Peat Marwick LLP Mountain View, California July 24, 1998 -----END PRIVACY-ENHANCED MESSAGE-----